What is a Fixed Deposit? Know the meaning & features of FD

One easy approach to accumulating wealth is to save money and invest. Your likelihood of experiencing financial difficulties later in life decreases the earlier you form the practice of saving money.

Saving money does not always equate to cutting expenses. In reality, saving entails maintaining things and investing in them to make them sufficient for the future. Saving money is not always pretty or glamorous. It requires discipline and sacrifice.

When it comes to investing, many investors are reluctant to place money in the equities market because of the perception of the high risk associated with the volatile economic conditions and instability in the finance industry.

Thus, investors are searching for risk-free investment opportunities that offer guaranteed income. Fixed deposits have become significantly more popular due to their various benefits.

A fixed deposit (FD) is a financial product made available by banks or NBFCs, offering customers higher interest rates than regular savings accounts. And so, in India, fixed deposit accounts are a standard instrument for investment.

FD comes with a restriction that the deposited funds cannot be withdrawn for a set period. If withdrawn, a penalty could be imposed.

FD interest rates vary from one lender to another. FDs may have a duration of seven days to twenty years. Investors can choose to withdraw their funds after maturity or extend their FD for another term.

A few characteristics of a fixed deposit account include:

• Usually, FD investment tenures range from seven days to ten years, and they differ between banks.

• Returns are guaranteed because, unlike in the case of equity and mutual funds, they are not based on market highs and lows.
• The investment return is compounded regularly – monthly, quarterly or annually.
• Lenders may allow premature or partial withdrawals with penalties.
  With RBL Bank Ltd., you can easily withdraw your FD before maturity with a penalty as low as 1%.
• Typically, higher interest rates are provided to senior citizens.
• Investors can renew their investment once it has reached maturity.
• In an emergency, individuals can opt for a loan against FD without withdrawing their investment.
• Under section 80C of the Income Tax Act, taxpayers can invest in tax-saving FD plans to reduce their tax liability.

A fixed deposit allows you to earn fixed returns for the period you want. An FD can be as short as 7 days and as long as 20 years. Based on your investment period, the interest rate is accrued.

The longer your investment period, the higher the FD rates.

There is a lock-in period of five years before which you can’t withdraw your deposited funds.

An FD comes with the following features:

• Fixed Returns
  Your FD rates won’t be affected by the market up and down. The interest rate decided at the time of booking will be final.
• Flexible Tenure
  A tenure from 7 days to 20 years to meet your requirements of lump sum cash as per your need.

Conclusion

Fixed deposits offer a guaranteed rate of return on investments, unlike market-linked products that may incur losses due to market volatility. FDs provide higher rates than savings accounts while still protecting your money.

Additionally, fixed deposits can provide your portfolio with some balance. While market-linked investments like stocks and mutual funds include some risk, FDs do not.

Further, FDs are best suited for short-term objectives. They are also a sensible investment option if you have financial goals and cannot afford to lose your invested money.