Fixed Deposits (FDs) stand out as a reliable option for those seeking a balance of simplicity and
returns. In India, FDs are celebrated for their ease of initiation and the assurance of favourable
returns. If you prioritise preserving your hard-earned money, aiming for financial goals with
minimal risk, and cherishing assured returns, an FD becomes a compelling choice. Despite the
widespread popularity of FDs, many people don’t know much about them. This article is your
guide about FDs, ensuring you grasp every detail and make informed financial decisions.
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What is a Fixed Deposit?
FDs are investment choices cherished by many in India. Their appeal lies in providing a secure,
long-term investment avenue with low-risk returns. Unlike the unpredictable fluctuations of the
stock market, FDs remain steadfast in preserving capital.
Investment behaviours in India consistently favour FDs over equities, showcasing a preference
for stability. A distinctive feature of FDs is the assurance of a predetermined interest rate,
offering certainty to depositors. This pre-agreed capacity ensures the accumulation of interest
without fail every year, providing a reliable stream of income.
Notably, FDs remain insulated from the impact of government-induced changes in interest rates.
This resilience contributes to the attractiveness of FDs as a financial instrument. In essence,
FDs stand as a reliable, time-tested choice for those seeking security, predictability, and a
steady growth of their invested capital.
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Types of FDs
You can find several fixed deposits tailored to diverse financial goals.
●Tax Saving Fixed Deposit: With a lock-in period of five years, these deposits qualify for
deductions under Section 80C of the Income Tax Act. Investors can claim deductions up
to Rs. 1,50,000/- per annum, making it a tax-efficient choice.
●Money Multiplier: Linked to a savings account where the money is transferred back from
the FD account to the savings account if the balance falls below Rs 10,000.
●Senior Citizen Fixed Deposit – Applicable to those over the age of 60. People who open
these accounts get a higher interest rate, typically in the range of 0.5%.
●Cumulative Fixed Deposit: Adhering to Reserve Bank of India (RBI) directives, interest
accrues at maturity, offering a compound benefit on both principal and interest
components. It’s a rewarding choice for long-term wealth creation.
●Non-cumulative Fixed Deposit: This scheme ensures a consistent income stream as
interest is not accumulated but paid at regular intervals. Options like monthly or quarterly
payouts provide flexibility for meeting regular expenses.
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Eligibility for FD Account
The eligibility to open an FD account is very simple.
●Individual Account: Individuals can open an FD account in their name.
●Joint Account: Flexibility extends to joint accounts, allowing more than one individual to
open an FD account.
●Minor Accounts: Minors aged 10 and above can also benefit from FDs. Parents can act
as guardians for these accounts.
●Institutional Accounts: Beyond individuals, clubs, associations, educational institutions,
partnerships, and joint-stock companies can invest in FDs. The only stipulation is that
they must be registered entities.
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FD interest calculation
Banks use two methods to calculate interest on FDs: compound interest (CI) and simple interest
(SI).
For SI, the formula is straightforward: S.I. = (P×R×T)/100, where P is the principal amount, R is
the rate of interest, and T is the time period in years.
Take Mr. X, for example, who invested Rs 10,000 at 7.1% p.a. for 2 years. Applying the SI
formula:
Step 1: 10,000×7.1×2 = Rs 1,42,000
Step 2: 1,42,000 ÷ 100 = Rs 1420
Interest = Rs 1,420.
Now, for CI, the formula is CI = P{(1+i/100)n -1}, where P is the principal amount, i is the rate of
interest, and n is the number of years.
Imagine Mr Y investing Rs 10,000 at 7.1% p.a. for 2 years. Applying the CI formula:
10,000{(1+7.1/100)2 -1} = Rs 1,511.
Interest earned = Rs 1,511.
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How to open an FD?
Now that you know what is FD. Here’s a step-by-step guide on how to open an FD account:
●Access Your Account: Log in to your account through the app or website of your bank, a
bank where you have a savings account.
●Navigate to FD Form: Once logged in, go to the FD Form within the banking platform.
●Specify Investment Amount and Tenure: Choose the amount you wish to invest and the
desired tenure for your FD. This decision influences the interest earned.
●Select Payout Plan: Tailor the payout plan according to your preferences.
●Review and Confirm: Before finalising, review your selected parameters, ensuring they
align with your financial objectives. Once confirmed, proceed with the submission.
●Confirmation of FD Activation: Upon successful submission and verification, your FD
account will be activated.
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Conclusion
Opening an FD is a seamless process, accessible to anyone with a savings account. With a few
clicks, you’ve secured your investment. Diversify your portfolio by integrating FDs, a sturdy pillar
in any investor’s financial strategy. As you embark on this journey, remember that FDs provide
simplicity and stability, making them a valuable addition to your financial portfolio.
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FAQs
1.What is the maximum amount that can be deposited in an FD?
The maximum deposit varies among banks. It’s advisable to check with your bank for
specific details.
2.What is FD nomination?
FD nomination allows you to designate a person who will receive the proceeds in case of
the depositor’s unfortunate demise.
