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A fixed deposit (FD) is one of the most popular investment tools in India and is offered by banks and non-banking financial institutions. The fundamental concept behind a fixed deposit is that an investor deposits a certain amount of money for a pre-decided period, and at the end of that period, he/she gets the money back along with interest. So, what is a fixed deposit exactly?
What is a Fixed Deposit?
A fixed deposit is a kind of term deposit wherein an investor deposits a fixed sum of money for a pre-determined period on which a fixed rate of interest is paid. The interest rates on fixed deposits are higher than the rates offered on savings accounts. Moreover, FDs are considered low-risk investments which provide guaranteed returns. Hence, they are a preferred choice of investment for many people in India, especially those who are risk-averse or wish to safeguard their savings.
How Does a Fixed Deposit Work?
Let’s take an example to illustrate how a fixed deposit works. Suppose you deposit INR 1,00,000 in a fixed deposit for a period of 2 years at an interest rate of 7%. At the end of the 2 years, you would receive INR 1,14,490 (That’s your initial investment of INR 1,00,000 plus interest of INR 14,490).
There are two types of fixed deposits – Cumulative and Non-Cumulative. In a cumulative fixed deposit, the interest is compounded yearly or quarterly and is paid out along with the principal at the end of the tenure. In a non-cumulative fixed deposit, the interest is paid out at regular intervals (monthly, quarterly, half-yearly or yearly) and the principal is paid back at the end of the tenure.
Fixed Deposit in the Post Office
Now that we’ve understood what is fixed deposit and how it works, let’s talk about the fixed deposit in the post office. Just like banks, India Post also provides the facility to open a fixed deposit account. Post office fixed deposit has been a popular choice for many Indians, primarily due to the higher interest rates compared to banks, and the trust associated with India Post. The tenure of deposit varies from 1 year to 5 years, and the rate of interest is revised by the government quarterly. As of October 2020, interest rates on Post Office Time Deposits are between 5.5% – 6.7%.
Conclusion
While choosing to invest in a fixed deposit, one should keep in mind certain factors such as the credibility of the institution, deposit tenure, interest rates, and whether the interest payout structure (cumulative or non-cumulative) suits their requirements.
Fixed Deposit provides a safe investment option to individuals who want to secure a part of their income and earn from it without taking any risks. However, it is important for every investor to understand that the return on investments can fluctuate based on market conditions and changes in government policies.
Summary:
Fixed Deposit is a type of term deposit offered by banks and non-banking financial institutions, where an investor deposits a fixed sum of money for a pre-determined period to earn a fixed rate of interest. Being a low-risk investment, it is a preferred choice for many individuals in India, especially those who are risk-averse or wish to protect their savings. Besides banks, fixed deposit in post office with attractive interest rates. One can choose between cumulative or non-cumulative interest payout structure as per their need. However, investors should analyze all the pros and cons before investing. Also, remember, returns can fluctuate due to market conditions and changes in government policies.
Disclaimer:
The investor must gauge all the pros and cons of trading in the Indian financial market and should make decisions based on their individual financial goals and risk appetite. This article is informational and does not provide financial advice.
