A fixed deposit or FD is an investment product that lets the depositor park their money for a fixed period to earn interest. It is illiquid and has a locking period, unlike a savings bank deposit.
How does a fixed deposit work?
- Fixed deposit accounts offer a higher rate of interest to the investor than most savings bank accounts
- FD is offered by both banks and non-banking financial companies (NBFCs)
- The minimum amount to open a fixed deposit account varies from bank to bank. For ex:- The minimum amount is Rs. 1000 for State Bank of India, whereas it is Rs. 5000 for Axis Bank through mobile app and Rs. 10000 when visiting the bank branch
- Withdrawing from an FD before the lockin period is over invites a penalty but is not prohibited. Also, there is an option to opt for an FD that provides regular interest which solely depends on the cash needs of the investor
- The interest earned on an FD is taxable according to the investor’s tax slab, with the issuer deducting 10 percent as tax deducted at source (TDS) on the interest, but there are tax-saving FDs as well
- The interest rates depend on the monetary policy of the Reserve Bank of India. If the lending rate is high, it will attract more deposits from the investors
Advantages of investing in a fixed deposit
- FDs with credible and strong banks are considered to be safer instruments than other riskier investment products
- Investors can also avail loan against their FD certificates
- It is more beneficial to invest in an FD rather than a savings account as the returns are higher
- Most importantly, to an investor who has no knowledge about stock markets, Investment in an FDs gives them the peace of mind
- They are usually inflation-adjusted
- The money is safe with the nationalized banks and has negligible risk as compared to returns ranging from 5-7.5%
- You get a regular income from a fixed deposit and there exists an option for monthly or quarterly interest pay-outs.