Fixed deposits are one of those asset classes that have gained popularity due to their lack of risk and regular returns. Read on to learn more about the benefits of FDs, their features, and more.
What is a fixed deposit?
A Fixed Deposit Receipt is an instrument issued by banks and financial institutions that promises to pay interest on deposits made during a certain period.
When you open a Fixed Deposit (FD), your money is locked in for a set period of time. At the end of the term, i.e. after the maturity period, the bank pays you back your principal amount plus some interest, which is your return.
Term deposits offer several advantages over time. Read on to understand its features and benefits.
Characteristics of fixed deposits
Although experts recommend having a decent number of FDs in an investment portfolio, you need to look at their characteristics to understand them better. Here are some of the most common characteristics of an FD.
1. Secure investment instruments
The most important feature of a fixed deposit is that it is risk free. Compared to other investment options which are heavily influenced by market conditions, term deposits are a safe investment option. FD returns are fixed and therefore a reliable investment option. At the end of the term period, you get guaranteed returns.
2. Interest rate
FDs provide stable interest as a return on the principal investment. These interest rates are generally higher than those of a savings account. It is important to note that interest rates fluctuate and are influenced by market conditions. In addition, the amount of principal deposited and the term of office also have a direct impact on interest income.
Interest is paid periodically or in full at maturity, depending on your preference. You may also notice that older people are offered higher interest rates.
3. Age and investment limit
A natural person over the age of 18 can open a DF. Minors can also open their accounts, but they must be managed by a guardian. Additionally, FDs require a minimum investment amount of Rs. 1,000, although there is no maximum limit. However, note that higher deposits attract higher interest income.
FDs are a long-term investment option. The maturity period can vary from 7 days to 10 years. The investor has the choice to choose the tenure. At maturity, the FD can be set for renewal.
An important feature to note about FDs is that they carry penalties on premature withdrawals. The penalty will depend on many factors like the number of days since opening, etc. ; This feature makes FD instruments illiquid.
Benefits of DFs
1. Guaranteed returns
FD returns are guaranteed unlike other investment options like stocks and mutual funds, where market factors determine returns. This is one of the most important advantages that FDs lend to their investors, making it an extremely attractive and popular avenue of investment.
2. Risk Free
Because they offer guaranteed returns, FDs carry minimal, if any, risk. This advantage can be used to protect your portfolio from the risk of other investment avenues. Even if you experience losses on your other investments, FD returns can help offset them. Thus, they can be an ideal addition to your portfolio.
FD interest income can be deducted when filing returns. Tax saving fixed deposits allow a maximum of Rs. 1.5 lakh tax deduction under Section 80C of the Income Tax Act 1961. So while you are earning interest , you pay no tax, making it a win-win situation.
3. Loan Facility
You can set up a loan against your FD investments. If you need funds, you can draw a loan on your FD, up to 90% of the invested amount.
A fixed deposit is a deposit you make with a bank or any financial institution that earns interest at a fixed rate and is locked in until maturity. The features and benefits of FDs make them a staple in any investment portfolio. They can also help balance the risk factor in your portfolio. So consider all the pointers mentioned above before investing in FDs.
Q1. How to open an FD?
Rep. You can go to the bank of your choice to open an FD with ease. Alternatively, you can open an FD online by visiting the bank’s website of your choice in just a few minutes.
Q2. What is the highest interest rate offered on FD in India?
Rep. The interest rate on FDs can go up to 7% or even more. The interest rate is influenced by many factors such as economic conditions, etc.
Q3. Are FDs better than equity investments?
Rep. All investment options have their own pros and cons. Although equities offer excellent returns, the risk is extremely high. On the other hand, FDs can offer standard returns at minimal risk. Your choice and preferences should be based on your risk tolerance.