Fixed Deposit 101: Fabulous Funds for Your Future

When individuals aim to build wealth over time, they often seek safe investment options, with Fixed Deposits (FDs) from commercial banks and Non-Banking Financial Companies (NBFCs) being among the most popular choices. FDs remain a preferred investment option for those looking for safety and stable returns, as they are not exposed to the market fluctuations, making them especially appealing to risk-averse investors. By depositing a lump sum with a bank for a fixed tenure, the principal earns a predetermined interest rate. With flexible durations ranging from a few months to several years, FDs offer security and predictability, catering to diverse financial goals. In this article, we will explore what an FD is, why it is considered a secure investment, and how it can help grow your wealth over time.

What is a Fixed Deposit?

A Fixed Deposit is a type of deposit account that banks and financial institutions offer. Here’s a simple breakdown:

Fixed deposits (FDs) are financial instruments where individuals commit their funds to the bank for a predetermined period. In return, banks offer interest on the deposit, typically at rates higher than those provided by standard savings accounts. This structured investment option appeals to risk-averse investors, as it combines stability with comparatively better returns, making it a reliable choice for secure financial growth

How Does an FD Work?

1. Determine the Amount:

Based on the bank’s specified minimum and maximum limits, determine the amount you want to set aside. For example, let’s assume you start with ₹10,000.

2. Fix the Tenure:

Choose the duration for which you want to keep your money in the fixed deposit. The institution will provide the tenure options based on the type of fixed deposit you select ranging from 6 months to 10 years.

3. The Interest Rate (Depending on the tenure and Institution):

• Public Sector Banks: Interest rates typically range from 6% to 7.5% per annum.
• Private Sector Banks: Interest rates range from 85% to 8.05% per annum, with some banks offering rates as high as 8.25%.
• Small Finance Banks: These banks offer higher interest rates, ranging from 25% to 9% per annum.
• Tax-Saving Fixed Deposits: Interest rates for General Citizens generally range from 6% to 8.25%, with Senior Citizens getting a slightly higher rate, typically 5% to 8.75%.
• Foreign Banks: Foreign banks offer interest rates between 4% and 8%.
• Company/Corporate FDs: Company FD rates range from 75% to 8.47% per annum, with additional rates offered to senior citizens.

The bank will offer you a set rate that will not change during the period of the deposit. To use a simple example, if the rate is 6% per annum, you will earn that same rate for the 12, 24, or 60 months that you have chosen to leave your money untouched.

4. Maturity:

When the deposit matures, you can withdraw both your principal and the accrued interest. Cumulative FDs are tailored for long-term wealth accumulation, offering compounded interest with payouts at maturity. On the other hand, Non-cumulative FDs provide regular interest payouts at intervals like monthly or quarterly, making them ideal for individuals who require a consistent income. Ultimately, the best option depends on your financial goals, income needs, and investment horizon.

Why Do You Need a Fixed Deposit?

Below are some excellent reasons to think before starting a fixed deposit:

• Safety: Fixed deposits are considered safe because they are backed by the bank. Your money is secure, and you won’t lose it.
• Guaranteed Returns: Unlike stocks or mutual funds, the interest rate on a fixed deposit is fixed. This means you know exactly how much money you will earn.
• Easy to Open: A fixed deposit is simple to open. You just need to visit a bank or do it online.
• No Market Risk: Your money is not affected by market fluctuations, which means you won’t lose money if the market goes down.

The Benefits of Fixed Deposits

Now, let’s examine some primary advantages of holding an FD:

How to Calculate Your FD Returns?

It is simple to figure out how much profit you will make from your FD. You can use this straightforward formula:

Profit = Principal x Rate x Time

Say you deposit ₹10,000 at a rate of 6% for a term of 5 years:

• Principal: ₹10,000
• Rate: 6% (or 0.06)
• Time: 5 years

By using the values in the formula of profit, we can see:

Profit = 10,000 x 0.06 x 5 = ₹ 3,000

So after 5 years, how much will you have? The amount that you will have is the sum of the profit and your original deposit. So, the total amount will equal:

Total Amount = Deposit + Profit = ₹10,000 + ₹3,000 = ₹13,000

Things to Remember

Keep the following points in mind before you open a Fixed Deposit:

• Tenure: Select a duration that aligns with your financial goals.
• Interest Rates: Look at various banks and their rates to ensure you’re getting a great deal.
• Premature Withdrawal: If you opt to take your funds out before maturity, do so with the understanding that you may lose some interest.

Pros of Fixed Deposits (FDs):

1. Safe Investment: FDs are very safe because your money is not affected by market ups and downs.
2. Guaranteed Returns: You are promised a fixed return on your investment, no matter what.
3. Fixed Interest Rate: The interest rate is fixed for the entire term of the FD.
4. Easy to Manage: FDs are easy to open, and you can track your investment without much effort.
5. Helps with Savings: FDs help you save money regularly without worrying about loss.
6. No Market Risk: The value of your FD doesn’t change with market conditions, so there’s no risk of loss.
7. Loan Facility: You can get a loan against your FD in case of an emergency.
8. Tax Saving Options: Some FDs allow you to save tax under section 80C.

Cons of Fixed Deposits:

1. Lower Returns: FDs don’t give high returns compared to other investments like stocks or mutual funds.
2. Early Withdrawal Penalty: If you need to take out your money before the FD term ends, you may lose some of the interest.
3. Taxable Income: The interest earned is taxable, so you have to pay tax on it.
4. No Protection Against Inflation: If inflation is high, the returns from your FD may not keep up with the rising costs.
5. Fixed Rate: If interest rates in the market go up, your FD won’t benefit from the higher rates.

Wrapping up

A Fixed Deposit is a great way to save money safely while earning interest. It is ideal for those who want a secure, risk-free return. With a Fixed Deposit, you don’t have to stress about stock market fluctuations or the safety of your initial investment.

If you have a specific amount you want to save for a big purchase or an upcoming event you should invest in Fixed Deposits for their long-term secured returns.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.