Opening a fixed deposit (FD) account is one of the simplest ways to grow your money over time. FDs offer stable returns with low risk, making them ideal for those new to investing or looking for relatively safe options.
Read on as we explain what fixed deposits are, their key features, the types available, and tips on choosing the suitable FD for your needs.
What is a Fixed Deposit?
A fixed deposit (FD) is an investment product offered by banks and non-banking financial companies (NBFCs). Investing in an FD involves depositing a lump sum amount with any bank or NBFC for a pre-decided tenure, ranging from 7 days to 10 years.
The financial institution invests the deposited money and pays a fixed rate of interest to the depositor on maturity. The rate of interest varies across institutions depending on the amount and tenure chosen. FD interest rates typically range from 3% to 7.5% per annum.
Key Features and Benefits of Fixed Deposits
Some of the primary features and benefits of fixed deposits are as follows:
- Safety: FDs carry no risk as returns are guaranteed by the issuing bank/NBFC. They are safer than stocks, mutual funds, etc.
- Flexible tenures: Depending on your goals, you can invest for as short as 7 days or as long as 10 years.
- Loan facility: If funds are needed, you can take out loans up to 90% of the FD value from the issuer.
- Tax-saving FDs: Get tax deductions up to ₹1.5 lakhs under Section 80C with 5-year tax-saving FDs.
- Premature withdrawal: In case of emergencies, it is important to close fixed deposits (FDs) early, even though penalties may apply.
Types of Fixed Deposits
Several types of FDs suit different investor needs:
- Cumulative FDs: Interest earned is reinvested to compound returns.
- Non-cumulative FDs: Interest is paid out periodically as per choice.
- Tax-saving FDs: 5-year lock-in but gives tax benefit under Section 80C.
- Senior citizen FDs: Higher interest rates for those over 60 years.
- Flexi/Sweep-in FDs: Allow part withdrawals while earning FD rates.
Choosing the Right FD Account
Here are key aspects to consider when picking an FD account:
- Interest rates and yields: Compare rates across banks and NBFCs before investing.
- Credibility: Check ratings by CRISIL and ICRA to assess the lender’s financial health.
- Flexibility in premature closure: Opt for an issuer that charges lower penalties on early withdrawals.
- Loan against FD facility: Useful in emergencies without breaking investments.
Summing Up
Fixed deposits offer stable, guaranteed returns for risk-averse investors, flexibility, and liquidity. Assess short- and long-term goals, choose reputed issuers, and match FD features to needs for optimum returns. Opening an FD is quick and easy, making it ideal even for first-time investors.