Fixed deposits (FDs) allow you to deposit an amount as per your financial capacity and have been a great investing tool to grow your savings. Whether it is a long-term goal like retirement planning, securing your child's future financially, or any short-term goal, bank FDs are preferred to include in an investment portfolio as a safe investment avenue. Let us elaborate on how FDs work.
How do Bank Fixed Deposits work?
You need to invest a lump sum amount in an FD for a lock-in period (tenure). It guarantees the return on the invested sum. The depositor gets the invested capital and interest after completing the lock-in period. Banks can use the deposit amount to lend to customers looking for borrowed funds against an interest rate.
Rate of Interest
The interest rate offered on an FD is the factor of a fixed period, called tenure, the period you have chosen to invest your funds. Other deciding factors on rates of interest on FD include the investment amount, interest payout frequency, and type of FD.
Interest Payout Frequency
An FD allows you to reinvest the interest or receive it periodically. For reinvestment purposes, you need to invest in a cumulative FD that provides you with an accumulated amount of the interest and the principal at maturity. In contrast, you can invest in a non-cumulative FD if you want a regular income stream. It provides you with an interest amount at fixed intervals. You can receive interest payments monthly/quarterly/half-yearly/annually, depending on the option available with the bank.
Although FDs are investments with a fixed tenure, banks allow depositors to withdraw funds during the tenure. The depositor needs to bear a penalty for such withdrawal. The withdrawal norms differ for banks, like the period after which the depositor can withdraw funds and the penalty implied. If you deposit in a tax-saving FD, you cannot withdraw funds before the maturity period of five years.
Key Benefits of Bank Fixed Deposits
1. Easiest Instruments to Invest in
FDs are the easiest investment instrument to put your funds into. Like any stock market investment, you need not go through an in-depth analysis before investing. Banks allow their customers to open an FD account online to make investing more convenient.
2. Low Minimum Investment
FDs are a good option if you want to start investing but do not have a large sum. FD investment amounts can start as low as Rs.1,000, and the investment amount can go up to 2 crores.
3. Know Returns Even Before Investing Your Funds
Banks provide a free and ready-to-use online fixed deposit calculator to estimate your FD returns. Using this calculator, you can calculate your FD returns before depositing your funds. You can adjust the investment amount, tenure, and payout frequency as often as you want to estimate the returns. It helps you know the right amount to deposit to get the desired returns at maturity.
4. Reduced Portfolio Risk
Different assets play different roles in an investment portfolio with a certain level of risk. A fixed deposit, with its assured returns, can bring stability to your portfolio. Therefore, it is a reliable investment avenue for investors with a low-risk appetite.
5. Multiplication of Funds with the Benefits of Compounding
An FD offers you returns with compounding power. It helps you to grow your invested funds faster. When you deposit in a cumulative FD, your interest gets reinvested, earning interest on interest.
6. Higher Returns for Senior Citizens
There are different types of FDs offered by a bank. It can be a regular FD, senior citizen FD, super senior citizen FD, Recurring Deposit, or tax-saving FD. Banks provide an additional interest rate on senior and super senior citizen FDs.
7. Overdraft / Credit Card Facility Against Deposit
FD depositors can enjoy liquidity with an Overdraft or Credit Card Facility of up to 90% of the principal amount. You need not withdraw FDs prematurely and can avoid penalty or loss on the rates of interest on FD.
This way, FDs work and help investors to earn assured returns without being impacted by market fluctuations. It does not matter how the economy performs. Your FD returns are fixed once you open an FD. Earn interest on the interest accrued and accumulate an enormous amount with ease. Using a calculator fixed deposit, plan your FD investments.