Banks are on spree of cutting down interest rates and this is the best time to lock in your funds at higher interest rates before it slips down more. Usually fixed deposit investment is one of the most transparent investment options, even an adolescent can open fixed deposit account within few minutes.
Hidden Features of Fixed Deposit Account
1. Floating Interest Rate
As the name suggest Fixed Deposit lock in money for a pre-defined tenure at pre-determined interest rate. You cannot alter it once it gets locked but there are few banks and NBFCs (non-banking financial corporations) that offer fixed deposits at floating interest rates. For instance IDBI and IOB (Indian Overseas Bank) offers term deposit at floating rates that are declared every quarter i.e. on 1st April, 1st July, 1st October and 1st January every year.
2. Reinvestment of Interest
In the scenario of increasing interest rate one can get the maximum benefit of Fixed Deposit by adopting option of reinvesting the interest amount. Under reinvestment option instead of crediting the interest every quarter, bank opens a new FD with the interest amount at the prevailing interest rate for the remaining tenure of original fixed deposit. For example if the interest is Rs.5,000/-, a new FD with Rs.5,000/- is open for the remaining tenure of original fixed deposit.
3. No Penalty
The harsh rule of fixed deposit is that if you are in dire need and requires breaking FD than you would have to suffer an interest loss of 1% as well as the interest rate is recalculated according to the time you had money deposited with bank. In simple words, suppose you deposited Rs.1 lakh with bank for 4 years at 9% p.a. but due to some personal urgency you had to break the FD in the 2nd year only. The interest would first gets recalculated on the rate of 2 years deposit prevailing at the time of making deposit and then 1% penalty would get deducted from the interest rate. So if the interest was 8.25% p.a. for 2 year term deposit then the interest amount which you earn would be only 7.25% p.a.
4. Flexible Term
Fixed Deposit investments are done keeping financial goals in mind such as down payment of house, child education, child marriage etc. but many times these goals gets postponed and the need of money deferred. In this case you would not like to take out money, pay tax and again deposit money as paying tax would erode your future earnings by considerable amount. Also the prevailing interest rates may be lesser. So what you can do is opt for extension of the FD. Your FD will simply be locked in for few more time on the same conditions. Though not all banks provide this facility but you can enquire with your bank.
5. Fixed Deposit with Insurance
Fixed Deposit not only enhances your wealth but also safeguard your health. Some banks and NBFCs offer insurance cover with the Fixed Deposits. One such NBFC is Dewan Housing Finance Limited (DHLF) that provides accidental death insurance of Rs.1 lakh linked with corporate deposit.
6. Loan against Fixed Deposit
Along with the add-on feature of insurance you can also avail loan against fixed deposit held with the banks or NBFCs. Fixed Deposit is amongst the most preferable collateral security against any loan or borrowings. The thumb rule is up to 80% of the deposit amount can be provided as loan in form of overdraft at an interest rate of 2% to 2.5% above the FD interest rate. This facility is an alternative offered to you instead of breaking your FD.
7. Integrated Fixed Deposits
Having number of Fixed Deposits associated with each financial goal is normal practice but this practice results into large paperwork. To avoid this cumbersome task some banks have introduced products where you can make bulk fixed deposit and divide the deposit into smaller denominations as per your requirements.
Fixed deposit double in how many years
Doubling money through fixed deposit is not a magic. You simply needs a calculator and know how to compound the interest rate to know the exact time to double your fixed deposit money.
Usually every bank calculates fixed deposit interest on quarterly basis and credits the same in the FD account. So if you invest in FD at 10% p.a. the effective rate of return translates into 10.38% p.a. and your money will be doubled in roughly 7 years.
Formula
Where,
P = principal amount (the initial amount you deposit)
r = annual rate of interest (as a decimal i.e. 9% is .09)
t = number of years the amount is deposited (tenure)
n = number of times the interest is compounded per year (usually 4 in FD)
A = accumulated money after n years, including interest.
You can also do the math by Rule 72 to know the approximate time to double your money.
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