What is a Fixed Deposit (FD)? The Full Form, Types, Interest Rate, and Benefits

Let us learn what “Fixed Deposit” means. A fixed deposit often called an “FD,” is a type of investment where a customer deposits a fixed amount of money with a financial institution. In exchange, the financial institution agreed to return the funds to the customer at a fixed interest rate. The customer has to wait until maturity, as per the agreement, to access the invested money. However, the customer can also withdraw the amount prematurely with some restrictions set by the financial institution.

Fixed deposits are popular among traditional investors because they offer a high degree of certainty about the return on investment. The interest rate on a fixed deposit account is typically higher than that of a regular savings account.

Types of Fixed Deposit (FD)

There are various types of FD in the Indian market such as regular, tax-saving, corporate, senior citizen, NRI, Flexi, etc.

The interest rate of an FD can range from ~2% to ~8% and depends on

• Financial Institution
• FD Tenure
• Type of FD

Benefits of FD

These are great ways to save money and get a guaranteed return on your investment. Here are a few benefits of opening a fixed deposits

• Fixed deposits give you a guaranteed return on your investment.
• It gives better income than a savings account.
• You can access your money at any time (with a reduced rate of interest).
• Few banks will treat their customers with premium services, or high-priority customers. Banks want to expand their support or offers to those customers with good banking history with them.
• Fixed deposits are a great way to save taxes under section 80 C.
• Automatic renewals of FD can be made easily through internet banking.
• FDs are secured as the interest rates will be constant throughout the investment plan.

Must Read: Top 6 Low-Risk Investment Options in India

Disadvantages of Fixed Deposit(FD)

There are a few disadvantages to using an FD account for your personal finances

• There are no tax benefits on the interest earned through an FD investment.
• FDs provide comparatively lower interest rates taking inflation into consideration. As its interest rate does not move as per the inflation rate, it usually gives low income.
• Funds are locked in for a specific period of time as per the FD agreement. Premature withdrawals are allowed by a few banks, however, it attracts penalty as a reduced rate of interest.

Opening an FD account

Opening a fixed deposit account is a simple process that can be done in a number of ways. The most common way to open a fixed deposit account is to go to a bank or financial institution, sign up for an account, and provide your identification and banking details. You may also be required to provide proof of residence, such as an Aadhaar Card, Passport, Driving Licence, utility bill, etc.

Once you have opened a fixed deposit account, you will need to deposit your money into the account. You can do this by transferring money from your bank account, or by depositing cash directly into the account. Once you have deposited the money, you will need to wait until the bank agrees to open the account. This might be anywhere between a few hours to a few days.

Now-a-day opening an FD account is much easier with internet banking. You can just log in to your internet banking, select the tenure, amount, and interest payout options and start an FD account instantly.

Interest Rate Calculation

Interest on a fixed deposit is calculated as a percentage of the deposited amount. This percentage is generally set by the bank or financial institution that is issuing the deposit. It is generally a higher percentage than what is offered on savings accounts or other types of investments. The interest is paid every month, year, quarterly, half-yearly, or at maturity which can be selected by the customer while opening an FD account (based on the options provided by various banks).

FAQ on Fixed Deposit (FD)