What is a Fixed Deposit and How Does it Work?

Fixed deposits are excellent and the most preferred option by risk-averse investors to multiply their hard-earned money. The account holder has to deposit the funds at the time of opening the FD account and select a tenure. The rate of interest is decided according to the chosen tenure and an assurance is paid for keeping the funds for a particular period. The interest on the principal amount is only paid upon the end of the tenure. Almost all the banks and NBFCs provide FD schemes. You can deposit money for as short a period as 7 days and up to 10 years (20 years in some banks).

How Does Fixed Deposit Work?

In a Fixed Deposit scheme, the deposited sum of money is blocked for the tenure of the deposit. Banks allow account holders the flexibility to invest their funds from periods as low as 7 days to 10 years. The rate of interest on the deposit depends on the period for which the funds are parked with the bank.

The depositor is not allowed to withdraw the money before the maturity date from their fixed deposit account. However, some banks also offer premature withdrawal facilities but premature withdrawal comes with a lower interest rate as a penalty. Upon maturity, the bank credits the principal and interest to the bank account of the depositor. Therefore, it is imperative to know the type of investment and understand its offerings before opting to invest. You can also calculate the amount to be invested and the interest you will earn, using the FD calculator that will help you make a firm decision.

Since the rate of interest and the tenure of the deposit are predetermined, this type of deposit is called Fixed Deposit. Fixed Deposits offer a flexible time period for which they can be opened, which implies you can open it for as long as you have idle funds.

Fix Deposits – Premature Withdrawal

Fixed Deposit can be closed before the maturity of the FD; during an emergency or in any other case in which you need the money urgently. If the Fixed Deposit is closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period the deposit has remained with the Bank. In case of premature withdrawal, the deposit may be subject to a penalty on the interest rate as prescribed by the Bank on the date of deposit. It is the banks’ decision to decide whether they want to impose any penalty on premature closure of fixed deposits

Nomination

Nomination is the process in which the account holder can appoint a person to take care of their assets in the event of their death. It helps the nominees to claim the money in Fixed Deposit.

What Happens in the Death of a Depositor?

Banks normally let the term deposit of the deceased account holder mature. But if you are the nominee of the term deposit, you can ask for a premature withdrawal by furnishing the death certificate and your identity proof.

Benefits of Fixed Deposit

  1. Return on Investment is Guaranteed

The funds are safe when you invest in Fixed deposits as the banks are RBI governed which ensures that you do not face any loss.

  1. Flexible Interest Rate Payouts

You earn an interest rate with the money deposited for a fixed period. There are banks that provide monthly, quarterly or yearly interest payout options. This ensures the proper flow of money to the depositor.

  1. The flexibility of Deposit Tenure

The fixed deposit has flexible terms; you can choose a short-term fixed deposit which you can withdraw within a month or a long-term where you wait for years until it matures. Banks vary in terms of tenure criteria, so be mindful while selecting the tenure suitable for you to avoid premature withdrawals.

  1. Easy to Open

You can easily open an FD account in a few steps. If you are a customer of the bank you want to open your FD with, the Fixed Deposit online opening option takes just a few clicks to get an account opened. However, you can also visit the bank’s nearest branch to open an FD account.

  1. Inculcates Saving Habit

Savings can be immensely useful in the time of need, especially with liquid options such as FD. Fixed deposits encourage the habit of savings in individuals by locking the funds for a fixed period. Since investing in a fixed deposit account does not attract any big risk, people are inclined towards the same.

If you want your money to multiply and not risk it by paying a penalty, then having a fixed deposit helps develop a good habit of saving by avoiding the temptation of withdrawing your funds during the ongoing tenure.

  1. Wide Range of Options

With almost all the banks and NBFCs providing FD schemes, one can choose their preferred option which offers the best fixed deposit rates.

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