The official name of an FD account is a fixed deposit account (FD account). This is an investment that requires depositing a fixed amount of money at a fixed FD interest rate with a bank or other financial institution for a fixed period. Everybody desires to keep their finances secure during unpredictable situations. They all seek refuge points in which their funds will not disappear overnight. This is the reason that quite a few folks like fixed deposits (FDs). These are a sanctuary for your funds, enabling them to appreciate with little danger involved. If you feel satisfied that your cash is secure and growing bit by bit, your mind rests calm. In this article, we will discuss the benefits of fixed deposits.
What is a Fixed Deposit?
A fixed deposit is an investment scheme where you deposit a sum of money for a specific period and receive interest.
The amount that you invest and the term of the investment will decide the rate of interest on a fixed deposit. You will therefore get back the amount invested plus interest compounded at the time of maturity. This applies only if you opt for a cumulative fixed deposit. Non-cumulative FDs are also an option that is open to you; these give you monthly or quarterly interest payments.
Fixed deposits are typically favored by investors because they are easy and secure. You still receive a fixed amount of interest after you make your lump sum payment. Changes in interest rates and market fluctuations do not affect returns on fixed deposits. There is no visible risk of losing your principal amount, and you are assured returns on your deposit.
You have the choice of getting the interest at maturity or periodically. But unless you don’t mind paying the penalty for early withdrawal, you can withdraw your deposit before maturity.
Benefits of Fixed Deposits
The main advantage of a fixed deposit account is that interest is calculated by the compound interest method. FDs usually compound every quarter. This means that the deposit and interest earned in the previous quarter are reinvested at the end of each quarter. Both the principal and the interest accrued would be utilized to calculate the total interest in the next quarter.
That is, you earn interest on interest, and your overall returns are boosted when it matures. Its stability is augmented by the reality that FDs typically have fixed maturity dates and that money is not available until the end of the maturity period. Let’s know about benefits of fixed deposit.
1. Rise in Interest Rates
FD interest rates are more than savings account interest rates. Investors can realize maximum savings with little risk. A compound interest rate is applied to calculate FD interest rates, which allows depositors to get higher returns at the time of maturity of FD.
2. Flexible Tenure of Deposits
From a mere seven days to ten years, fixed deposits offer you an extensive span of investment duration. If you are planning something short-term, like buying a car or going for a holiday, you can go for short-term FDs. However, again, the power of compounding can benefit you in earning more interest when your FD matures provided you have invested for a longer period.
3. Investments with Low Risk
The danger associated with fixed deposits is very little. In contrast to mutual funds, they are not linked products to the market. The rate of interest remains constant and unaffected by fluctuations in the market throughout the length of the deposit. To boot, investments in FDs are also guaranteed by every bank’s Deposit Insurance and Credit Guarantee Corporation (DICGC) for ₹5 lakh per depositor.
4. Simple Access to Funds
FDs have better liquidity facilities compared to PPF (Public Provident Fund), ELSS (Equity-Linked Saving Schemes), and some other small saving schemes. If you face any emergency, you can withdraw your deposit amount from FD. However, penalties might be charged for premature FD withdrawal. Kindly note that only callable FDs can benefit from the facility of premature withdrawal.
You cannot withdraw money from non-callable FDs before the date of maturity. However, the bank may allow you to withdraw money in certain specific situations.
5. Open FD from Anywhere
Goodbye to long and time-consuming paperwork and avoid the queue. Digital Fixed Deposits made it possible for you to book an FD whenever and wherever you want. You can save a lot of time and energy since the entire process is paperless.
6. Tax Benefits
You can lower your tax outgo although interest income earned on FD is taxable under the Income Tax Act of 1961. Tax deductions of ₹1.5 lakh are allowed for tax-saving fixed deposits under Section 80C of the Income Tax Act. However, do note that Tax-Saving FDs attract a 5-year lock-in period which bars premature withdrawals.
7. Overdraft or Loan Against FD
Do you require additional funds to pay for pressing bills? You can utilize your fixed deposit as security for a loan or overdraft facility instead of borrowing a high-interest personal loan. Overdraft interest rates are much lower compared to personal loans. Moreover, you are not required to repay the loan. Your FD term and this term are the same.
There is no need for the loan to be repaid in installments. Just ensure that money is returned on or before the date when your FD matures. At the time of maturity, any leftover amount will be settled with your FD proceeds.
8. Build a relationship with your bank
When and if you take out a loan, your relationship with your bank can assist you in being given top-notch services. Availing of the best loan rates or other banking products and services may be facilitated by availing of a fixed deposit account, since banks would rather deal with customers who have been previously banking with them.
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Conclusion
For risk-averse individuals, The FD benefits make it a reliable investment option since it offers stability and assured returns. It is less attractive to some extent, however, because of the inflexibility of the funds and potentially lower returns compared to other investment vehicles. You need to carefully weigh the advantages and disadvantages of a fixed deposit account to align its characteristics with your financial goals.
FAQs
Is fixed deposit a safe method to invest?
Ans. Since they are safe and are guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC) to the tune of ₹5 lakh per account, per depositor, fixed deposits are a safe investment option.
Can the depositor able to withdraw money from my fixed deposit before maturity?
Ans. It is, however, possible to withdraw your fixed deposit before it is due to mature. But this may result in a penalty or at a rate of interest lower than that agreed upon. Moreover, this facility is available only for non-callable FDs.
How do fixed deposit compound interest rates work?
Ans. The original amount and interest earned on past periods are utilized to calculate compound interest. This results in a drastic increase in the long term.
What advantages of fixed deposit accounts are given to depositors by financial institutions?
Ans. As fixed deposits are not linked to the market, your wealth will grow regardless of whether the market fluctuates. Moreover, DICGC covers FD investments with up to ₹5 lakh, lessening the likelihood of losing your money.
A fixed deposit needs what amount as a minimum deposit?
Ans. Different banks have various minimum deposit values but the lowest among all is INR 1000.
