What Is an FD and How Does It Work: All You Need to Know About It
A fixed deposit (FD) is a financial instrument offered by banks and other financial institutions. It allows customers to invest their money for a fixed period of time, during which they earn interest at a fixed rate. FDs are a popular investment option because they offer security and stability, especially in times of economic uncertainty. However, they also come with certain risks, so it’s important to understand how they work before investing your money. In this blog post, we will explain everything you need to know about fixed deposits, including how they work, the advantages and disadvantages of investing in them, and some important things to keep in mind before you make a deposit.
What is a fixed deposit?
An FD is a financial instrument provided by banks or non-financial bank companies (NBFCs) that offers customers the benefit of earning a higher rate of interest than what is offered on a regular savings account.
The tenure of an FD can range anywhere between 7 days and 10 years, and the interest rate offered is also commensurate with the period of deposit. For instance, for an FD booked for a tenure of 1 year, the interest rate offered would be lower than that for an FD with a tenure of 2 years.
The principal amount and the interest earned on it are both payable at maturity. In cases of premature withdrawal, customers are usually subject to a penalty fee.
Fixed deposits are one of the safest investment options, as they are backed by the government and offer guaranteed returns. They are also simple to operate and can be easily accessed through online banking channels.
How does a fixed deposit work?
When you deposit money into a bank account, the bank pays you interest on that money. The interest rate is usually higher than the rate for a savings account, and the longer you leave your money in the account, the more interest you earn. This is called a fixed deposit or term deposit.
To open a fixed deposit account, you need to have a certain amount of money to deposit, and you agree to leave it in the account for a set period of time – typically between 1 month and 5 years. During this time, you usually cannot access your money without incurring penalties.
At the end of the fixed term, your money is returned to you, plus any interest that has accumulated over the term. Some banks allow you to roll over your fixed deposit into another term, or you can withdraw your money.
What are the Benefits of a Fixed Deposit?
The main benefit of a fixed deposit is that it offers fixed interest rates for a set period of time, meaning you know exactly how much your returns will be. This makes fixed deposits ideal for those looking to grow their money without taking on too much risk. Additionally, many banks and financial institutions offer higher interest rates for larger deposits, so if you have a large sum of money to invest, a fixed deposit account could be a good option. Another benefit is that fixed deposits are typically very low-risk investments, which can appeal to those who are risk-averse. Finally, most banks allow you to make withdrawals from your fixed deposit before the end of the term, though there may be penalties involved.
What are the Types of Fixed Deposits?
However, there are different types of FDs that cater to different needs. Here are the different types of FDs that you should know about:
1. Regular Fixed Deposit: This is the most common type of FD where you can deposit a lump sum amount for a specific tenure at a fixed interest rate. The interest earned is paid out at the end of the term along with the principal amount.
2. Cumulative Fixed Deposit: This type of FD allows you to earn compound interest on your investment. The interest earned is reinvested and added to your principal amount. This means that you earn interest not only on your original investment but also on the accumulated interest. At the end of the investment period, you get back the entire amount, including both the principal and accumulated interest.
3. Recurring Deposit: A recurring deposit helps you make instalments over a period of time into your fixed deposit account. This type is best suited for those who do not have a lump sum amount to invest but want to build their corpus over time through systematic investments. The instalments can be weekly, monthly, or any other interval agreed upon by you and the bank through a signed contract.
How to Open a Fixed Deposit Account?
We have already explained above what a fixed deposit is; we will now proceed to tell you how you can open a fixed deposit account. This is quite simple and can be done by following the steps below:
1. Find a bank or financial institution that offers fixed deposits. There are many banks and financial institutions that offer this service, so take your time to compare their interest rates and terms before choosing one.
2. Once you have chosen a bank or financial institution, you will need to visit their website or branch to fill out an application form. Be sure to read the terms and conditions carefully before signing the form.
3. After filling out the form, you will need to make a deposit into your account. The amount of money you need to deposit will depend on the bank or financial institution you choose, so be sure to check their requirements beforehand.
4. Once the deposit has been made, your account will be activated, and you can start earning interest on your money!
Conclusion
A fixed deposit is a great way to grow your money while keeping it safe and accessible. It’s important to understand how fixed deposits work before investing, and this article has hopefully given you a good overview. Be sure to shop around for the best interest rates and terms before committing to a fixed deposit, and always remember that your money is at risk if you choose to cash in your deposit early. You can visit Piramal Finance’s website for all your financial needs.