Why is fixed deposit important

Why are Fixed Deposits important and what are the advantages?

Fixed Deposits (FD) are the most popular investment options among individuals looking for a safe and secure way to grow their savings. It is a type of Savings Account in which a person deposits a lump sum of money for a specified period, usually from months to several years. In return, the bank offers a guaranteed interest rate higher than the interest rate offered on a regular Savings Account. 

Let us find out why FDs are important and highlight their key advantages. From the stability of returns to the flexibility of investment options, we will explore the factors that make FDs a popular choice for people looking to grow their wealth. 

What is the meaning of a Fixed Deposit?

You deposit a lump sum of money into a Fixed Deposit for a set period at a fixed interest rate. When the Fixed Deposit's term is up, you receive the money you initially put down plus compound interest. 

Who qualifies?

In India, the following entities are permitted to open a Fixed Deposit Account: 

• Indian nationals
• NRIs
• Minors
• Elderly people
• Company Partnerships
• Companies
• Clubs and Societies
• Single-person business
• Investors (alone or in groups).

How does a Fixed Deposit work?

A Fixed Deposit is an investment option with a guaranteed return provided by the banks and enables you to invest a one-time lump sum payment for a pre-determined period and earn a higher interest than a Savings Account. 

Once you deposit money with your bank, it begins to earn interest based on how long the deposit has been there. An FD may last for a duration of seven days to ten years. You can withdraw money from your FD account prematurely. However, there may be a penalty if you do so.

You have flexibility in selecting the tenure of a Fixed Deposit. It can therefore be used as long as you have available finances. The principal sum and interest are credited to the account holder's bank account on the date of maturity by the bank. 

Before investing, you must know the investment and its features, benefits and various types. 

Different types of Fixed Deposits

You need to be aware of the many types of Fixed Deposits offered in the market before you set aside money for one. To learn more, read on:

1. Standard Fixed Deposit

One must commit to a specified period and a fixed interest rate to invest money in a normal Fixed Deposit. A standard Fixed Deposit can be made anytime and the tenure varies from seven days to 10 years.

2. Particular Fixed Deposit

Special FDs are popular among many stakeholders and offer a higher interest rate. Because they are often only given for a limited time, special Fixed Deposits are considered special, if they fall anywhere between 290 and 390 days.

3. Tax-Saving Fixed Deposit

Unlike standard Fixed Deposits, tax-saving Fixed Deposits cannot be reserved for terms shorter than five years. According to section 80C of the Income Tax Act 1961, the sum invested is tax-exempt, but the Fixed Deposit interest earned is subject to taxation.

4. Floater Fixed Deposit

People can benefit from a floating interest rate by investing in a floating Fixed Deposit, which fluctuates quarterly or annually.

The rules set forth by the Reserve Bank of India (RBI) influence changes to interest rates. Fixed Deposits will undoubtedly become more and more popular as banks offer their investors higher interest rates. The principal amount and the way the money develops security, in addition to a promised interest rate, have made Fixed Deposits an alluring investment for Indians. Additionally, it provides individuals with a consistent source of income in the form of interest, which they can either reclaim or reinvest.

Advantages of Fixed Deposits

Read on to learn about the advantages of Fixed Deposits:

1. Assurance of Returns

The certainty of returns is one of the key benefits of investing in a Fixed Deposit Account. You will receive a fixed interest rate on your investment when the FD matures. Compared to other investment options like Mutual Funds, this implies no risks.

2. Convenient to use

You could open a Fixed Deposit Account very easily and quickly. Apply for it online, or request that a bank representative open one for you when you visit the nearest branch.

How long should I make an FD investment?

How quickly you want to reach your financial objective will determine the time you need to invest in an FD. An FD tenure would be suitable for short-term objectives of up to a year, but a tax-saving FD with a 5-year tenure would be better suited for long-term investment objectives.

With a Fixed Deposit, your financial stability is assured. The convenience and ease of use of an FD are its main features. Based on your comfort level, you can choose whether to open an FD online or offline, once you have a basic idea of a Fixed Deposit and how it works.