Investing is primarily driven by our needs, wants, and objectives. The abundance of available financial options makes personal finance quite challenging. Fixed deposits (FDs) have successfully met the financial needs of an entire generation, and the vast majority of investors still prefer to place their funds in them.
Asset allocation is one of the best ways to build wealth. There are a variety of asset classes, including equities, gold, fixed deposits, etc., and each plays a unique role in the investment portfolio. On the one hand, mutual funds generally offer long-term growth potential for funds, whereas fixed income options such as fixed deposits provide portfolio stability through their guaranteed returns. If the investment portfolio is appropriately diversified across asset classes, including FD, it ensures that the volatility of the investment returns is minimised and that investors have a stress-free investment experience.
What are Fixed Deposits?
A fixed deposit, also known as an FD, is an investment instrument offered by banks and Non-Banking Financial Companies (NBFCs) to help their customers save money. With an FD account, individuals can invest a certain amount of funds at a predetermined interest rate for a specified time period. This is a good way to save money because, at the end of the term, individuals receive the lump sum, along with an interest rate. Different interest rates are offered by banks for fixed deposit accounts.
How Does a Fixed Deposit Work?
The fund invested in the fixed deposit account remains locked for the predetermined period, during which a customer deposits money and earns interest. Customers have the option to invest for a duration usually between 7 days and 10 years through banks. The amount can still be invested for the desired tenure after the maturity period. Customers are not allowed to take money out before it matures, but if they do for any reason, they usually have to pay a penalty. After the maturity of a fixed deposit, the bank transfers the principal plus interest to the customer’s bank account.
Features of Fixed Deposits
A few important features of fixed deposits are as follows:
- The investment tenure of FDs varies amongst banks, ranging from a few months to several years.
- The ROI (return on investment) is compounded on a periodic basis, which may be monthly, quarterly, or annually.
- Senior citizens earn returns that are generally higher than regular fixed deposits.
- Under Section 80C, taxpayers can invest in tax-saving FDs to reduce their tax liability.
- Investors have the option to reinvest when the investment matures for another period.
- Loans against FDs are offered.
A Few Reasons To Have Fixed Deposits In A Portfolio
- A Safe Investment
In the investing portfolio, various assets serve various purposes. A fixed deposit is viewed as a particularly secure investment option due to its assured returns and stability, in contrast to equity investments such as stocks, mutual funds, and shares, which are subject to market volatility. Unlike other investments, generally, investors are assured of a return when they invest some amount of money.
- Flexible Tenures
A fixed deposit generally has a minimum duration of six months, which can be extended up to a maximum duration of ten years or more. This time frame ensures that an investor will earn the highest possible returns on their investment over a specified time period. Therefore, by looking up the tenure and rate of interest to be earned on a predetermined deposit, one may find out the precise amount that can be received after the fixed tenure.
- Short-Term Goals
A fixed deposit is regarded as the best investment option if individuals are trying to meet their short-term goals. One may desire to achieve a short-term objective within one to three years of their investment. These objectives’ main goal is to safeguard the principal amount while also earning some interest. For instance, short-term goals could be setting a date for the family’s next vacation or purchasing a type of technology for the home in a year. Because investors may invest in a fixed deposit according to their budget and if they calculate the expected return at the time of investment, they can achieve these short-term goals.
- Guaranteed Returns Upon Maturity:
Users are aware of the amount they will receive as a return when investing their money in a fixed deposit scheme. They will get the same interest rate throughout the duration of the FD scheme as arranged at the time of purchase, regardless of the country’s economic situation and the current rate of interest on FDs.
- Easy access to FDs
With the advancement of banking technology, investors are no longer required to visit a bank in person to open or renew a fixed deposit (FD). Nowadays, it is simple to do so at the investor’s convenience using internet banking or mobile banking.
The added benefit
In addition to all of this, there are a number of other advantages to including FDs in the investment portfolio because they come with loan facilities that make it simpler for investors to access money in times of need, whether they are looking for security, certainty, or just plain comfort in terms of returns and benefits.
Fixed Deposit Types
Let’s discuss some of the categories of fixed deposits available in India:
- Cumulative Fixed Deposit: In a cumulative FD, the interest on the principal balance is compounded at a predetermined interval. Suh interest is paid at the end of the deposit’s maturity along with the principal amount but not prior to that day. The total interest earned under this form of FD is quite significant because it is compounded by adding the interest accrued over the course of the FD tenor to the principal. Cumulative fixed deposits are recommended for investors who want to grow their savings or build a large investment corpus for specific investing goals.
- Non-Cumulative Fixed Deposits: Non-cumulative fixed deposits are the sorts of FDs that offer interest on a monthly, quarterly, half-yearly, or annual basis, depending on the investor’s preference. This sort of FD produces a recurring income throughout the course of the term because interest is not accumulated but rather paid out periodically. The interest generated and the payout amount are low because the payout frequency is on the higher side. Such an FD is suggested for individuals seeking recurring fund expenses without affecting the principal.
- Regular Fixed Deposit: This is the classic kind of FD, and the duration might be anywhere from seven days to ten years. Almost all bank types, regardless of size or objective, offer this form of FD. One can obtain a loan in exchange for such FDs. Investors receive a standard rate of fixed interest on such deposits.
- Tax-Saving Fixed Deposits: In accordance with their name, tax-saving fixed deposits help in tax savings. Available at almost every bank in the country, tax-saving FDs only permit a single lump-sum deposit. Tax-saving FDs also have a 5-year lock-in period during which money cannot be withdrawn. It should be remembered that tax-saving FDs permit investors to deduct up to Rs. 1.5 lakh in taxes each year.
- Senior Citizen Fixed Deposits: Senior citizen fixed deposits are a common FD choice for the elderly. This FD type makes it simple for seniors to open an FD account. The senior citizen’s age must be more than 60 years old. Senior citizen fixed deposits come with a special interest rate from banks, which is one of their primary characteristics. Additionally, this sort of FD generally gives flexibility in the tenure. The elderly can readily use their senior citizen FD to enjoy a consistent and trustworthy income source in their post-retirement lives.
- Flexi Fixed Deposits: According to its name, the Flexi fixed deposit is a form of the fixed deposit that offers customers flexibility and convenience. This form of FD is the ideal blend of a fixed deposit and a savings account. The investors in this sort of fixed deposit benefit from high FD interest rates as well as the liquidity provided by savings accounts. Additionally, Flexi fixed deposits sometimes allow for partial savings/current account withdrawals up to a certain sum (generally merged with a fixed deposit in Flexi FDs).
- Fixed NRI Deposits: As the name implies, NRI fixed deposits are a sort of fixed deposit that non-resident Indians may use (NRIs). NRIs can choose from a wide range of fixed deposit choices when it comes time to make a decision. NRIs can choose from a variety of NRI fixed deposit choices depending on their unique needs, including NRE fixed deposits, NRO fixed deposits, etc.
Conclusion
The benefits and reasons for investing make it abundantly clear that a fixed deposit is a very profitable and advantageous choice for stabilising and expanding the investment portfolio. Fixed deposits are a popular form of investment in India due to their low-risk profile and high return guarantee. Each financial institution determines its own interest rates based on the term, which typically ranges between 4 – 8 %.
Frequently Asked Questions (FAQs)
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How Can I Select the Best Fixed Deposit?
A few points to be considered before investing:
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- The interest rate: An investor must take into account the interest rate and its viability as offered by banks or financial organisations. Deposits with a longer term generally provide a higher interest rate. Additionally, in order to make the best choice, it is essential to analyse the various schemes and their interest rates.
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- Facility for loans and overdrafts: Many FDs provide their investors with both an overdraft facility and a loan facility. You may borrow up to a very good amount of money with this type. As a result, if you are someone who wants to invest their money for a long time to receive decent interest rates but, at the same time, would like some liquidity to be kept, a deposit like this would be the best option for you.
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- Credibility: The majority of FDs are risk-free, but when selecting corporate FDs or other tax-saving deposits, be sure to check the authenticity of the organization. Before investing your money, you must be aware of the credit rating of such deposits.
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- Withdrawals: You must be aware of the withdrawal policies associated with the sort of fixed deposit you want to use if you don’t want to incur additional fees. Premature withdrawals from your fixed deposit account generally incur fees of 0.1% to 0.75 % from banks.
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- Investment Duration: As an investor, you must be certain of your investment objectives and, as a result, decide on an investment tenure. You can choose your fixed deposit type based on your eligibility and the length of the required period because many deposits have a set lock-in while others have a broad range of tenure requirements.
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What are the benefits of investing in a fixed deposit?
Due to its numerous advantages, a fixed deposit is regarded as one of the safest investment options and is considered the preferred investment product by many investors worldwide. A fixed deposit also referred to as a term deposit, is one of the most reliable financial instruments available. For instance, based on your selected interest payment plan, you receive safe, stable, and fixed returns on a defined date. You have the option of monthly, quarterly, and semiannual interest payment plans. Some of the benefits of investing are as follows:
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- Guaranteed Interest Rate: The guaranteed interest rate is one of the main benefits of investing in a fixed deposit. Once you make an investment in an FD, you will undoubtedly receive the rate of interest that you and your bank have agreed upon. The interest rate on FDs is also available on the official websites of banks and NBFCs. You may quickly determine the interest rate and invest with the bank or NBFC offering the highest interest rate.
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- Loan: If you have a sudden need for money, you can apply for a loan against your fixed deposit. Since a loan against an FD is a secured loan, with the FD serving as collateral, the interest rate will be less than that of an unsecured loan. It’s an easy and simple process. You might be eligible for a loan for a sum of between 70% and 90% of the fixed deposit amount. This range differs from bank to bank/NBFC to NBFC.
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- A Flexible Tenure: You can invest in a fixed deposit for a term that works with your goals or financial needs. You have the option of investing for a tenure of 7 days to 10 years.
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- Secure investment plan: One of the most important FD benefits is a secure investment plan. Fixed deposits are one of the instruments that are best suited for you if you are anticipating a guaranteed return on your investment because the rate of return on a fixed deposit is fixed and you will receive your principal amount back along with additional interest after a fixed term.
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- Low risk: Low risk is one of the advantages of fixed deposits because the interest rate is not impacted by market volatility, making them a less risky investment.
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