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How Do Fixed Deposits Work?

Updated On Oct 01, 2021

Fixed Deposits are one of the most reliable financial options for people seeking a predictable return. A Fixed Deposit is a form of an account in which the funds are held for a certain amount of time and are given an assured rate of interest. Fixed Deposits are a simple approach to make money with money that is sitting around. If you are wondering how Fixed Deposits function and why the bank pays a greater interest rate on them, the following article will answer your questions. 

How Do Fixed Deposits Work?

Banks offer Savings Accounts and Current Accounts; however, depositors in these accounts have the ability to withdraw their funds at any moment. Current accounts are required to maintain a zero balance, and the amount in those accounts cannot be calculated. Banks require a steady supply of capital to make loans. Fixed Deposits are the most effective approach for them to raise this cash.

Fixed Deposits are deposits with a fixed rate of interest for a set length of time decided by the investor. You can deposit money for as little as seven days and as much as ten years. When you open a fixed deposit with a bank or a non-banking financial institution, the bank uses your funds to make loans to borrowers. It pays you interest in exchange. Fixed deposit rates are set by each bank or financial institution that offers them. Changes in repo rates, as revised by the Reserve Bank of India from time to time, have an impact on it. The rate of interest on a savings account varies depending on the time period and the amount deposited. Furthermore, most banks provide older citizens with preferential interest rates. Furthermore,  in comparison to banks, NBFCs are more likely to provide greater interest rates.

One of the most important things to understand about how FDs work is that you will be entitled to the rate of interest that was offered to you when you originally made the deposit, even if the prevailing interest rates vary up or down over the term of the FD. This assurance gives investors peace of mind, which is one of the reasons why fixed deposits are so popular.

What Are The Benefits Of A Fixed Deposit?

Opening a fixed deposit account has a number of benefits. 

  • Guaranteed Returns - One of the most appealing aspects of investing in a fixed deposit account is that it provides a guarantee of returns. When compared to other types of investments, such as mutual funds, this means there are no risks. On the investment amount, a fixed rate of interest will be paid at maturity.

  • Opening A Fixed Deposit Account Is Simple - In only a few minutes, you can open an FD account. It is possible to apply for it online or in person at your local bank.

  • High Interest - Customers can earn a larger rate of interest on fixed deposits than they can on savings accounts or other types of term deposits.

  • Adjustable Tenure - You can open a fixed deposit account for a duration ranging from seven days to ten years. 

  • Multiple FD Accounts - Multiple FD accounts can be opened at the same time. If you want to make a greater investment, you can always open a new FD account.

  • Tax Benefit - You can claim a tax exemption of up to Rs 1,50,000 under Section 80C of the Income Tax Act of India.

Take Away

Knowing about financial possibilities would be quite beneficial to you. It will help you decide whether or not you want to invest in FDs. FDs might be your initial investment tool because they are one of the safest investment options. As you gain experience, you might begin to diversify your portfolio. Investing is crucial because it ensures current and future financial security. You can accumulate wealth over time by making wise investments. Therefore, you should get started early and get more rewards as you progress.

Also read:  

Top 5 Fixed Deposit Schemes in India

Reasons Why Fixed Deposit Should Be In Your Investment Portfolio

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.   

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