Definition And Features Of Fixed Deposits
Updated On Aug 17, 2021
Investing can be done for a number of different reasons. It could be to stay ahead of inflation, establish a retirement fund, or save money on taxes. While there are a number of alternatives available to satisfy such needs, most people choose fixed deposits as it is a straightforward and uncomplicated investing option that is ideal for risk-averse investors. Let us learn about the definition and features of a fixed deposit account in detail.
What is a Fixed Deposit (FD)?
A fixed deposit (FD), often known as a term deposit, is a type of investment offered by banks and non-banking financial firms (NBFCs). People invest a set amount of money in an FD for a set period of time at a predefined rate of interest. The interest rate varies by the financial institution, although it is typically higher than that paid on savings accounts. Fixed deposits are available for various time periods, ranging from 7-14 days to 10 years.
What are the Features of Fixed Deposit?
Here are some of the characteristics that emphasise the advantages of investing in a fixed deposit scheme.
- Flexibility - You can get a short-term, medium-term, and long-term fixed deposit. Banks and non-bank financial institutions (NBFCs) offer variable loan terms ranging from seven days to ten years, with some lenders offering up to twenty years. This gives you the freedom to select an appropriate duration based on your investment objectives.
- Fixed Interest Rates - Interest rates on FDs are set when you start the account, and the rate is determined by the length of time you choose to keep it open.
- Guaranteed Returns - The returns on a fixed deposit are calculated using a predetermined rate of interest (set at the time of booking the FD) unaffected by economic volatility. This allows for better financial planning because tools like an FD calculator, which are freely available online, can simply compute the projected maturity amount.
- Multiple Payout Options - You have two options for collecting interest on your principal: cumulative or non-cumulative. If you select the cumulative option, the interest will be compounded and transferred into your account at the conclusion of your fixed deposit term. Non-cumulative interest can be collected at regular periods, such as monthly, quarterly, or yearly.
- Wealth Creation - Even during market downturns, the steady income received on the investment assures that the investors' wealth grows.
- Withdrawal Penalty - Term deposits are deemed ‘locked-in' since they have a definite tenure. If the investor chooses to withdraw from the deposit before the lock-in period expires, they will be charged a penalty as well as get less interest.
- Loan Against Deposit - If an investor requires financial liquidity in an uncertain situation, he/she can borrow up to 60-75 per cent of the fixed deposit amount.
- Insurance on Deposit - Any deposit in a qualified bank is eligible for insurance coverage of up to Rs 1 lakh under the Deposit Insurance and Credit Guarantee Corporation, according to RBI regulations (DICGC).
- Tax Benefits - The interest earned on the deposit is taxable income under the Income Tax Act, and it may be subject to a Tax Deducted at Source (TDS).
For the majority of the public, fixed deposits have been the preferred investment option. Unlike other similar products, it provides investors with guaranteed profits and is not volatile. Its straightforward structure and numerous advantages have worked in its favour.
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.