How do Fixed Deposits Work?

For us, making investments in fixed deposits has been an essential component. There is extremely little risk involved because assured returns are promised.

What is a fixed deposit?

In simple terms, a fixed deposit is an account that you open with a bank and put funds into. The funds are kept in the account for a certain amount of time and you get an assured rate of interest for doing so.

With fixed deposits, interest is the last thing to be paid out. Both the duration of a fixed deposit and the interest rate is fixed, so you can easily figure out how much interest you will earn at the end.

How do fixed deposits work?

When a customer opens a fixed deposit account, one of the things the investor can choose is the “tenure” (or “term”) of the fixed deposit. When you choose a term, you promise not to take any money out of your account for a certain amount of time, like a month, three months, six months, a year, etc. The length of a contract can be anywhere from one month to five years. Each tenure comes with a fixed interest rate. 

Every bank has already set fixed interest rates for deposits and the length of time they are held.

How is interest calculated on the fixed deposit?

How much money can be made from fixed deposits depends on three main things: the amount of money put in, the interest rate, and the length of time the money is invested. The basic formula for figuring out the interest on your FD is as follows:

Interest on FD = Amount Invested x Interest Rate x (Duration/ 12 months)

Also, if the tenure is higher then the interest rate will also be higher. For example, a 7-day fixed deposit will have a lower interest rate compared to one year fixed deposit.

What are the types of fixed deposits?

1. Standard Fixed DepositThis type of fixed deposit is by far the most common. You can open a regular fixed deposit with your savings account at almost any bank or NBFC in the world. The bank gives a fixed interest rate depending on the tenure that you have chosen. Depending on the bank you choose, this deposit could be held for anywhere from seven days to ten years.
2. Corporate Fixed DepositMost of the time, private companies or NBFCs make a corporate fixed deposit. Since this is a corporate fixed deposit, the interest rates are usually higher than those offered by banks. Check the credit rating of the company to make sure your money is safe.
3. Cumulative Fixed DepositA cumulative account is a lot like a regular fixed deposit in that you have to invest your money over a certain amount of time. When you make a cumulative fixed deposit, you won’t be able to get money back at regular intervals. Instead, you’ll get your money back when the deposit matures. This type of fixed deposit is appropriate for individuals who want to reach long-term investment goals.
4. Non-Cumulative Fixed DepositThis plan is great for people who have monthly bills or expenses, like rent or EMIs (Equated Monthly Investments). The rate at which you earn interest on your investment is determined by how often you choose to receive interest payments.
5. Senior Citizen Fixed DepositTo qualify for this deposit, you need to be at least 60 years old. Long-term fixed deposits, which offer an interest rate premium of 0.50% over the standard rate, are especially useful for retirees, who stand to profit from the higher rate.
6. Tax Saving Fixed DepositsThis deposit, which may be made at nearly any bank, enables you to reduce the amount of money that you owe in taxes. There is a tax exemption given each year in the amount of Rs 1.5 lakh. There is a lock-in period of five years, during which you are unable to make any withdrawals from the account.

What are the benefits of a fixed deposit?

The benefits of fixed deposits are as follows:

• The money can be invested without risk.
• The interest rate on a fixed deposit is guaranteed to remain constant throughout time.
• Fixed deposit yields are immune to market volatility.
• You have the option of receiving interest on a monthly or quarterly basis, or in a lump sum upon maturity if you choose the cumulative method.
• For senior citizens, banks offer a 0.5% higher interest rate.

What are the features of fixed deposits?

Here are the features of fixed deposit:

1. Assured ReturnsYou are ensured to receive a guaranteed return once you invest in a fixed deposit as the interest rates don’t influence market fluctuations hence keeping the deposit safe.
2. Interest RatesYou can get more interest on your money if you invest it in an FD instead of just putting it in a regular savings account. Most of the time, the interest rates on corporate FDs are higher than those offered by traditional banks.
3. Flexible TenureThe owner of a fixed deposit account is the only one who can decide how long a deposit will be held. Depending on the bank or other financial organisation, the minimum amount of time you have to invest in an FD can be anywhere from seven days to ten years.
4. Tax PerksIf you commit to a tax-saving FD for five years, you may be able to reduce or get rid of your tax burden. Section 80C of the Income Tax Act of 1961 says that you can take up to Rs 1.5 lakhs out of your fixed deposit. You won’t be able to get the money in a tax-deferred FD for as long as the investment is in place.

Conclusion

If you want to invest but can’t bring yourself to take risks with your money, a fixed deposit is a great option to look into. You get assured returns on fixed deposits and there are no risks involved.

When in doubt, it may be worthwhile to seek the advice of an organisation such as Piramal Finance. You can learn about the interest rates at Piramal Finance, and as a result, analyse the aspects that go into making FD investments.