Introduction to fixed deposit
One of the powerful ways to keep money in a safe instrument with reasonably high returns is the fixed deposit or the FD. There are different types of fixed deposits available to you like short term deposits, long term deposits, cumulative deposits, recurring deposits etc. In addition, the fixed deposits for senior citizens offer higher rates of interest by around 50 to 60 basis points. Today, you use an FD calculator to determine the best FD for you.
Even among the banks, there is a lot of variations in the rates of interest offered on these fixed deposits or FDs. You can scout around for the best FD rates since there are private banks and smaller banks that are offering FD rates of above 7-8% when the normal PSU FD rat is around 6.5%. What is more important about the fixed deposit is that it entails a very simple process. You can open a fixed deposit online and enjoy the benefits.
Now let us come down to the basic definition of what fixed deposit is all about and what are the features of a fixed deposit. A fixed deposit (FD) is typically offered by banks and non-banking finance companies (NBFCs). You grow a lumpsum amount over a fixed tenure. The rates of interest may not be as high as you earn on some of the more risky instruments, but the risk in FDs is also much lower and above all it is not impacted by market conditions.
Key features of a fixed deposit (FD)
Here are some standout features of a fixed deposit. Note that we have not included corporate FDs here due to the higher company level risk involved.
a) The FD returns are fixed at the time of buying the FD and do not change over the tenure of the FD. That is why it is considered to be a reliable and stable source of income. Even if rates fall after you buy the FD, you continue to earn the old contracted rates on FDs.
b) What about risk of loss of principal. If you go to the large NBFCs, the risk is quite low. In the case of scheduled banks, your FDs are covered under the deposit insurance of up to Rs5 lakhs offered by the DICGC. Even otherwise, government has rarely allowed banks to fail, so the risk of default is almost nil in bank FDs.
c) You can tweak the FD choice based on the risk you are willing to take. For example, new private banks offer higher rates than old private banks and PSU banks. Similarly, NBFCs also offer higher rates of interest compared to the banks.
d) FDs can be easily renewed online with no additional administrative effort. Also, when you renew the FD, the rates would be the current rates applicable, so you don’t lose out too much if the rates have gone up after you bought the FD.
e) FDs are flexible in that you have a choice of tenure, periodicity of interest payments, nature of instruments etc. You can even opt for a tax saving FD by going for a five year period or more so that you get the Section 80C benefits on your FD investment.
f) FDs are not as illiquid as it is made out to be. For instance, you can always break the FD by paying a small charge and that can be done at short notice. Easier still, is the ability to take a loan against the FD up to 80% to 85% of the value of the bank FD and this process can be entirely handled online.
One thing to remember is that interest on FD is taxed at your normal applicable rate viz. 20% or 30%. However, in case you don’t fall in the taxable category, you can submit Form 15G or Form 15H to the bank to not deduct TDS on interest.