Fixed Deposits (FD) continue to be one of the most preferred investment options for millions of Indian households due to its assured returns and safety of capital features. The term FD is itself synonymous to trust and safety in the investment space. So, what is a fixed deposit, and how does it manage to offer a higher interest rate?
Let’s discuss in detail.
What Is a Fixed
Deposit?
A fixed deposit is an extension of savings account in which the banks pay an assured rate of interest on the deposit kept in for a particular period. The rates offered on fixed deposits are higher compared to the savings account, and the money is blocked for use during that period.
Fixed deposits are an ideal investment option for risk-averse investors and those looking for stable returns on their surplus money. Further, fixed deposits can also be used as a hedge against inflation.
How Do Fixed
Deposits Work?
In fixed deposits, you have the flexibility to choose the tenure of the deposit, which ranges from 7 days to 10 years. Each tenure has a predetermined rate of interest fixed against it, which is quoted below:
| 7 days to 45 days | 4.5% |
| 46 days to 179 days | 5.5% |
| 180 days 210 days | 6% |
| 211 days to 1 year | 6% |
| 1 year to less than 2 years | 6.7% |
| 2 year to less than 3 years | 6.5% |
| 3 year to less than 5 years | 6.25% |
| 5 years to less than 10 years | 6.25% |
For senior citizens, banks offer the best FD rates, which is usually 0.50% higher than the normal FD rates.
Once you have decided on the tenure and placed the FD request, you are not allowed to withdraw before the due date. In some cases, banks allow premature withdrawal. In that case, banks impose a penalty in the form of a lower interest rate on the deposit.
Interest Rate
Calculation
Fixed deposits enjoy the benefit of compounding interest. It means interest earned is added to your principal amount at the end of each year. The result is a higher interest income in the subsequent years.
Therefore, the longer the tenure of your FD, the higher will be the interest yield at maturity.
You can also calculate your total interest
income by using fixed
deposit calculator. The
free online calculator helps you make a firm decision on the tenure of the FD.
How Do Fixed
Deposits Offer a Higher Interest Rate?
Banks require a constant flow of funds to continue with their lending activity and depend on fixed deposits to raise funds.
The amount raised through FDs are offered as loans by banks, which earns them a higher interest rate, and banks, in turn, pay you a higher interest rate on FDs.
Technically, you lend money to the bank, and the bank gives you a higher share of income or profit.
Other account types like a savings account and current account don’t offer flexibility to banks. Here, depositors can withdraw the money at any point, depending on their requirement, which results in a lot of uncertainty in funds status for banks.
Conclusion
Investing in FD schemes is a great way to grow your wealth over a long period without worrying about market conditions.
Features like higher interest rates for senior citizens, benefits of compounding interest, flexible tenure, and choice of interest payouts make it the most preferred option to park surplus money.
