What are Fixed Deposits?
Fixed Deposits are valuable long–term investment options that many Indians rely on time and time again. The primary reason people have continued to choose Fixed Deposits as an investment plan is because they offer a secured investment opportunity for depositors against a fixed return.
Fixed deposits are unaffected by anything related to the stock market. Indians have continued to exhibit an investment behavior which tells us that they prefer Fixed deposits over investing in equities.
They give the depositor the certainty of a pre-determined interest rate and can accumulate interest at a pre-agreed capacity without fail every year. Furthermore, any changes in the interest rates set by the government in India would not affect your Fixed deposits whatsoever.
Why Do the Banking System Need Fixed Deposits?
Banks need a source of income to distribute as loans. They do this through Fixed Deposits, the most effective approach they have found to raise this capital. A deposit locks up money for the term of the warranty.
The bank uses the capital to further loans to other customers instead of which the customer receives interest.
Advantages of Getting a Fixed Deposit
- Investments are more volatile than fixed deposits. Regarding fixed deposits, the uncertainty and hazards of stock market investing are mainly absent.
- For those without a high credit score, obtaining a credit card or engaging in any other type of financial activity might be difficult. Banks favor giving credit to those who have fixed deposits on their names in these situations.
- Investors can choose their final gains depending on the cumulative interest rate by selecting the sort of fixed deposit they are most comfortable with.
- Most financial institutions in India allow consumers to make deposits that will enable early withdrawals, providing them more freedom. The option of an early departure is one that many customers value because it ensures they will have access to money in times of need.
- Before an interest amount exceeds Rs. 40,000 on regular FDs and Rs. 50,000 for Senior Citizen FDs, banks are not required to deduct tax from any interest. This means the bank won’t remove any tax unless a customer’s interest earnings across all fixed deposits equal at least Rs. 40,000 (Rs. 50,000 for Senior Citizen FDs). This gives owners of tiny deposits comfort.
- You can estimate the sum assured using the FD interest rate calculator.
How Do Fixed Deposits Work?
- A fixed deposit (FD) lets a person invest lump sums for anything between 7 days and 10 years at an interest rate that varies based on the chosen period.
- Banks tend to offer better interest rates the longer the FD is held, but they also make your funds unavailable until the term is over.
- The length of time the funds are deposited with the bank determines the interest rate on the deposit. The money cannot be withdrawn by the depositor prior to the payment due date. Some banks provide a facility for premature withdrawal, although the interest rate is lower.
- The principal and interest are credited to the depositor’s bank account on the day of maturity by the bank. Therefore, before making a choice, you must be aware of the type of investment and comprehend its features.
The Types of Fixed Deposit Chosen also gives us a glimpse into the system in which FDs work. For instance, in a Cumulative Fixed Deposit:
- The return is provided at the very end of the tenure of maturity
- The interest earned along with the principal sum, compounds throughout the tenure
In a Non – accumulated FD the returns can be periodic, based on the needs and requirements of the investor. If the investor feels they need monthly interest payouts in order to meet their bill payments, then they can opt for it accordingly.
Similarly, quarterly, half – yearly or annual payouts can also be opted for. While choosing varied payout options, the mechanism of these accumulated sums also keeps changing. Here’s hoping this article helped you decipher the ways in which a fixed deposit works. This knowledge is likely to help you make sound financial decisions down the line.