April 26, 2023

What is Fixed Deposit (FD): Interest Rates, Benefits & Account Opening Process

What is a Fixed Deposit?

Fixed deposit (FD) is a common financial instrument that most banks and non-banking financial institutions (NBFCs) offer to their customers. It is also called a 'term deposit.' Customers can invest a specific amount of money through an FD for a specific amount of time at a specific interest rate. You receive your sum and the compounded interest at the end of the fixed time.
The interest rate depends on the tenure you hold your FD for. Fixed deposits are offered for various lengths, from extremely brief tenures of 7 to 14 days to long tenures of 10 years.

How Does It Work?

One may compare a fixed deposit to a loan to a bank or an NBFC. When you invest in an FD, the financial institution assures you that it will return your money at the end of the tenure, often known as the maturity period, and will also pay you interest. You receive a percentage of this interest. The bank may use this cash to lend to further borrowers, who will be charged interest.
The tenure or maturity duration of the FD determines the interest rate. A 7-day FD will have a lower annual interest rate than a one-year FD. It makes up for the financial time risk. Simply put, a rupee today is worth more than it will be in a year. It is because inflation gradually drives up prices. A rupee today will buy you more products than it will in a year. This calls for payment to an investor.

Features

  • The principal only needs to be submitted once. You should start a new Fixed deposit if you want to make more deposits.
  • The interest rate is more than the savings account's rate.
  • The tenure spans between seven days and ten years.
  • Fixed deposits can be easily renewed.
  • Before the maturity period, one can rarely withdraw. The account holder is responsible for any penalties associated with an emergency withdrawal.

Types

Standard Fixed Deposit

A typical fixed deposit entails an investment of funds for a certain amount of time at a predetermined interest rate. A standard fixed deposit can be made for a duration of 7 days to 10 years. The majority of stakeholders have chosen this FD option.

Special Fixed Deposit

Unique Fixed Deposits are considered special since they are frequently provided for a limited time. A particular time frame can last anywhere from 290 to 390 days. Special FDs are preferred by many stakeholders since they provide a higher interest rate.

Tax Saving Fixed Deposit

Tax-savingUnlike standard fixed deposits, tax-saving fixed deposits cannot be reserved for terms shorter than five years. Section 80C of the Income Tax Act of 1961 exempts the amount invested from taxation, but the interest earned on the FD is subject to taxation.

Floating Fixed Deposit

In a floating fixed deposit, the rate fluctuates every three months or once a year, and customers can benefit from shifting interest rates.
The Reserve Bank of India's guidelines dictate how the interest rate will vary.

Benefits

Guaranteed returns

Fixed deposits offer a guaranteed rate of return on investments, in contrast to market-linked instruments, which could experience losses due to market volatility. FDs offer safer capital preservation and higher yields than savings accounts.

Compounding

By investing in FDs, you can receive interest on interest, resulting in bigger returns and quicker money growth.

Low Minimum Investment

FDs are a fantastic alternative if you want to develop an investment habit but need a sizable sum of money to do so. Investment amounts can start as low as Rs. 500.

Liquidity

One may withdraw an FD before maturity, but they will lose some interest in the time that is missed. However, since you can liquidate the FD in an emergency, this gives you the advantage of liquidity.

Easy procedure

Net banking or mobile banking make it simple to invest in FDs both offline and online.

How to open an FD Account?

Online Process

As a shareholder, you can easily open an FD account online and benefit from features like simple payment, closure, and renewal. Various banks may have different procedures, but the general steps you can take to open an FD account online remain the same.
To open a fixed deposit account online:
  • Go to the bank's online website.
  • Log in to your current ID or create a new one.
  • Choose 'FD account' from the menu.
  • Include all relevant information, including the principal amount, candidate, tenure, etc.
  • Verify your information and send in your payment.
  • Download the receipt as soon as possible for your records.

Offline Process

Any bank you choose would allow you to open an FD account, even if you already have one. It doesn't matter if you already have an account with the bank; the procedure for opening an FD account is the same for everyone. These are the procedures:
With an existing account: Submit the completed FD application form to your bank branch.
Without an existing account: You must complete your KYC by submitting the FD application form and documentation proving your identity, address, and other details.

Who Should Invest in FD?

FDs are a good investment option for:
  • People who wish to invest with a low-risk appetite. (FDs assure returns)
  • People who want to meet short-term goals. (Volatility in FDs is low)
  • People who want to balance the risk in their portfolio. (FDs balance the risks of market-linked instruments like mutual funds)
  • Retired individuals who are looking for a stable income source

Taxation

The term and frequency of withdrawals determine your fixed deposit's interest rate.
You can use the following formula to determine the FD interest rate: -
A = P(1 + r/n)^n*t
Where,
A: Maturity amount
P: Principal
r: rate of interest
n: compound interest frequency
t: Total tenure
The rate that the bank prorates and the frequency of payouts determine the interest payment made upon maturity of a fixed deposit. Either simple interest or compound interest is used to calculate the interest on the principal amount. The sum due upon a contract expiration is higher with compound interest because, after each compounding, interest is calculated on the principal.

Eligibility

Entities eligible for opening an FD account in India are:
  • Indian residents, including minors and senior citizens
  • NRIs
  • Companies
  • Partnership Firms
  • Societies and Clubs
  • Individuals or Joint investors

How Can FD Help Your Portfolio?

Balance

FDs are safer than other market-linked instruments that contain an element of risk. Thus they add balance to your portfolio.

Positive Net Value

FDs can maintain a positive net value of your portfolio even when the market is low.

Suitable For Short-Term Goals

FDs are a better choice for short-term financial goals, unlike equities which are better for long-term goals.

FAQs

What is the minimum age requirement for opening an FD?

There can be an FD for even a year-old child, but the parents or guardians must hold it on the child's behalf. Anyone over 18 can open an FD account.

Is FD transferable?

No, a fixed deposit is not transferable.

Can I liquidate my FD before maturity?

Yes. Most banks allow premature withdrawal of FDs in cases of emergency after levying a minor penalty, but not on tax-saving FDs.

Never miss a trading opportunity with Margin Trading Facility

Enjoy 2X leverage on over 900+ stocks

Upstox Margin Trading Facility
Apple Logo
Downloadlogo
iOS App
Google Play Logo
Downloadlogo
Android App

RELATED ARTICLES

RBI Increases Repo Rate & Exactly How Will it Impact You?

The Reserve Bank of India's decision to increase the repo rate has been making headlines lately. And as expected by many, the RBI Hikes repo rate has been increased by 25 basis points to 6.50%. In this article, we will discuss what happens if the RBI increases the repo rate and how the recent RBI interest rate hike in the repo rate by the RBI, makes an impact. Whether you are a borrower or a saver, it is essential to understand the implications of the rate hike and how it may affect your financial planning. So, let's look at the subject and understand what it means for you.

ATM Cash Withdrawal Limits of India's Top Banks

As an individual, it's essential to have access to cash when you need it. One way to do this is through ATMs, which allow you to withdraw money from your bank account anytime, day or night. However, there are limits to how much cash you can withdraw from an ATM in a single transaction or within a certain timeframe. These limits vary from bank to bank and can affect your ability to access the cash you need. In this blog post, we'll be comparing the ATM cash withdrawal limits of some of India's top banks. By the end of this post, you'll better understand ATM cash withdrawal limits.

IDFC First Bank Customer Care Number - Toll Free Number Details

IDFC FIRST Bank is a private sector bank in India that offers a wide range of banking and financial services to its customers. The bank has a dedicated customer care team that is available to assist customers with their queries and concerns. The IDFC FIRST Bank customer care number is 1800 419 4332.

Canara Bank Timings: Working and Lunch Timings for Today and Saturday

Canara Bank timings are different for different services and different branches. However, most of the branches are open from Monday to Friday, 10:00 AM to 3:30 PM and Canara bank timings on Saturday are from 10:00 AM to 3:30 PM. Second and Forth Saturday of the month the bank is closed. Bank is also closed on all Sundays, national holidays, and gazetted holidays. Some of the branches have extended hours on certain days of the week. However, some branches open at 9:00 AM or close at 5:00 PM, it will vary depending on the location and the demand of the services in that area. Canara Bank's online banking services and Canara Bank's mobile banking services are also available 24/7, customers can access their account information, make transactions, pay bills and more from the comfort of their home or office. The bank's customer service is also available during the Canara bank working timings, customers can call the customer service hotline or visit the bank's website for assistance with any queries or issues they may have. It's worth noting that Canara Bank timings branches and services may be subject to change due to COVID-19 and the bank may have different timings for its branches based on the local regulations. Therefore, it's recommended to check the timings of the branch you're planning to visit before visiting it, to ensure that the branch is open and available during the time you plan to visit.