Fixed deposits (FDs) are financial instruments available to customers of banks and non-banking financial institutions (NBFCs). By investing a sum for a time period through an FD, people get a specific interest rate on their investment, helping them grow their wealth. Although the interest rate can vary from one financial institution to another, it is often higher than the interest rate of an average savings account.
One can choose the duration of investment with FDs. They range from short durations of 7 to 14 days to long tenures of 10 years. Deposits that have a maturity date are known as term deposits.
How does a fixed deposit work?
When you invest in an FD, the financial institution assures you that it will return your money at the end of the term, often known as the maturity period, and will also pay you interest. The bank may use this cash to lend to further borrowers, who will be charged interest. You receive a percentage of this interest.
The tenure or maturity duration of the FD determines the interest that will be given. In comparison to a one-year FD, a 7-day FD will have a lower annual interest rate. This is done to make up for the financial time risk. Simply put, a rupee today is worth more than it will be in a year.
When a cumulative FD matures, you receive both the interest and the principle. Every year, the interest is reinvested. As a result, you will only be entitled to a lump sum payment at the end of the FD duration rather than recurring interest payments.
Interest on non-cumulative FDs will be paid to you at regular intervals. Depending on your needs, you can select to receive interest payments monthly, quarterly, half-yearly, or annually.
How is interest on FDs calculated?
The amount deposited, the interest rate, and the investment duration are factors in determining the interest earned on fixed deposits. The following is a basic formula to determine interest in your FD:
Interest on FD = Investment Amount x Interest Rate x (12 months of Duration)
However, the interest rate will differ depending on whether you select a cumulative or non-cumulative FD. For instance, if you decide to invest 25,000 for three years at an interest rate of 7.1% annually, the maturity value of a cumulative fixed-rate deposit would be 30,712.
Benefits of A Fixed Deposit
Since the beginning of time, fixed deposits have been the preferred investment option for innumerable Indians. And there is justification for it. Over time, fixed deposits have transformed into highly adaptable financial solutions with many advantages.
The following are a few of an FD’s huge benefits:
Fixed payouts
Returns on a fixed deposit are guaranteed. When you start an FD, the interest rate given to you stays the same for the duration of your investment. Your FD won’t be impacted if interest rates decrease across the board. As a result, you don’t need to be concerned by the market’s fluctuations.
No-hassle investing
If you already have a savings account, opening an FD only takes a few clicks online or in person at the nearby branch. You don’t need to bother about it once you’ve opened it until it’s fully developed. You can set maturity instructions so that they automatically renew or credit your account with the maturity funds.
Magic of Compounding
Compound interest will help you if you select an FD with a reinvestment option (which basically means that you will earn interest not just on the principal amount but also on the interest you earn).
Regular revenue
You may choose to receive interest payments on a monthly or quarterly basis if you want consistent returns.
How to Make Fixed Deposit Investments
You may create an FD account with your selected financial institution both online and offline. Complete the necessary forms, then submit your KYC paperwork. In a few days, the account will be operational.
Complete the FD information
Include the amount, duration, and interest payment type for your FD in the fields provided.
Open a brokerage account
Set up your investment account by providing the necessary information.
Payment
Make the required Fixed Deposit payment.
Conclusion
Fixed deposits have transformed into highly adaptable financial solutions with a wide range of advantages in India. With Fi.Money, exploring, and investing in FDs have never been easier! Not only can you start goal-based FDs, but you can also quickly access and track your investment via the FI.Money app. With up to 5.95% interest p.a, Fi.Money helps you ensure you’re covered for major and minor life events.
