How Does Fixed Deposit Work? A Complete Guide

How Does Fixed Deposit Work
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Introduction

In India, fixed deposits and cash make up more than 50% of all household assets.

Fixed deposits provide a simple and convenient way of growing wealth by offering fixed interest payments for a specified period. 

Fixed deposits are an economical option for long and short-term savings. The returns on fixed deposits depend upon the bank type, maturity, rate offered, and tenure. 

Once the FD matures, the amount deposited with the bank is returned to the investor along with interest. 

This investment enables individuals to generate income and save for future financial goals. An FD also provides various tax advantages to investors. FDs are considered safer than equities and have become a preferred investment vehicle during uncertain times. 

How does a fixed deposit work?

To understand how fixed deposits work, it is crucial to understand that two parties are involved. 

The first party is the financial institution/bank, and the second one is the depositor/customer. Banks require money to run their operations; thus, they borrow money from depositors in the form of current, savings, and other accounts.

Fixed deposits, which come with specific interest rates, are one method of getting money. In exchange, banks pay a fixed interest to the lenders/depositors.

In an FD, the depositor/customer invests a fixed amount for the period of the FD. During the period of the FD, the depositor cannot withdraw the money. 

Some banks allow premature withdrawals, but they charge a penalty for that. Depositors can invest their money in an FD for seven days to 20 years.

Fixed deposit interest calculation is done in advance by the bank providing it, and the interest rate in fixed deposit remains constant throughout the FD term. 

The depositors can opt for cumulative FD or non-cumulative FD. In a cumulative FD, depositors will receive the entire interest amount at maturity; in a non-cumulative FD, depositors will receive the interest periodically.

The interest amount and the principal are credited to the customer’s account by the bank upon maturity.

Depositors have various options when investing in an FD; thus, understanding the different types of FD, their pros and cons, and fixed deposit interest calculation is vital. 

For fixed deposit interest calculation, you may utilise the online FD calculator and estimate the investment amount required and the interest you will receive to help you make an informed decision.

What are the pros of investing in an FD?

A few of the pros of investing in an FD account are:

1. Assured returns 

Returns are guaranteed, which is one of the key benefits of investing in fixed deposit accounts. Compared to other forms of investing, such as stocks and mutual funds, this entails very less risk.

On maturity, the capital invested will be returned with any remaining interest. The interest rate in fixed deposits is higher than in savings accounts while still keeping your wealth safe.

2. Easy process

FDs are the most straightforward investments to make, whether investing offline or online via net banking or mobile banking.

RBL bank’s fixed deposit scheme is one of India’s best-fixed deposit plans. It provides numerous exclusive advantages and one of India’s highest fixed deposit interest rates. 

You may receive interest of up to 7.50% on your fixed deposits with RBL Bank Ltd., a reputable and reliable financial institution.  

3. Liquidity

Although it is possible to withdraw FDs early, you might have to pay the penalty. However, since you may liquidate the FD in an emergency, you benefit from liquidity.

4. Benefits of compounding 

Depositors’ investment returns will be higher, and their money will grow faster with FDs since they may receive interest on interest.

5. Higher rates for senior citizens 

FDs usually provide a higher interest rate in fixed deposits to senior citizens to encourage them to save and help them lead better-retired lives. 

6. Tax benefits 

Taxpayers may invest in tax-saving fixed deposit plans to lower their tax liabilities u/s 80C of the Income Tax Act. 

Conclusion

Fixed deposits can provide your portfolio with some balance. While market-linked investments like stocks and mutual funds include some risk, FDs do not. They are secure investments that deliver a guaranteed return over a predetermined time frame.

Equities can help investors achieve their long-term financial objectives, while fixed deposits are more suited for achieving their short-term goals. They are also a sensible investment decision if you have financial objectives and cannot afford to lose your invested money.

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