A fixed deposit account is an investment scheme offered by banks to customers who want to make use of their savings or extra earnings to create wealth. Fixed deposits (FD) offer guaranteed returns to the depositor on the amount he invests. An individual can invest in a fixed deposit for a tenure of his choice, depending on his immediate financial requirements and future financial goals. There are various types of fixed deposits, such as regular fixed deposits, tax saving fixed deposits, senior citizen fixed deposits, and super senior citizen fixed deposits.
How Fixed Deposits Give High Returns?
The earnings on a fixed deposit account are in the form of interest payments offered by the bank. Fixed deposits give the investor higher returns than a bank savings account while giving the same security on the deposited money. A regular savings account may fetch you an interest payout of about 6.25% per annum. On the other hand, a fixed deposit can give an interest return of up to 7.25% per annum in some categories. This difference can amount to a significant sum if the invested amount is large or the investment tenure is long.
Apart from bringing high returns for an investor, fixed deposits also give the security of deposited sum and an assurity of pre-decided returns. While market-based instruments like stocks may look lucrative on the face, they are market-dependent. This means that a slight fluctuation in the market or the socio-political or economic set-up of the country or anywhere in the world can have a huge impact on your investment. On the contrary, a fixed deposit is safe from all such uncertainties and the FD interest rates do not change once the bank fixes them at the time of opening the FD.
Benefits of Investing in a Fixed Deposit
A fixed deposit offers multiple benefits to the depositor. Some of them are:
- Higher returns: The most common benefit of a fixed deposit for which most people invest in it is the high returns it offers. As discussed earlier, fixed deposits offer better returns than savings accounts, helping the depositor counter the effect of inflation.
- Tax benefits: Along with high returns, a fixed deposit can also give tax benefits to the investor. You can invest in a tax-saving fixed deposit and avail of tax benefits under Section 80C of the Income Tax Act 1961. However, an investor should remember that a tax-saving fixed deposit has a lock-in period of five years and there is no scope for premature withdrawal on such a fixed deposit.
- Credit Card against FD: If an investor faces an urgent need for funds, he does not have to break his FD prematurely. Instead, he can take a credit card against the FD and continue to get the interest returns the bank is providing on his FD. Several banks offer up to 90% of the FD’s value as a credit to FD holders.
- Flexible tenure: The bank fixes the tenure of a fixed deposit at the time of creating a fixed deposit account. The depositor has the freedom to choose a tenure of his choice. The fixed deposit tenure can be anywhere between 7 days to 20 years.
- One-time effort: Investing in a fixed deposit is a one-time effort. Once you deposit the lump sum amount and start a fixed deposit, you can relax as the returns are guaranteed and the tenure is fixed.
Types of Fixed Deposit
An investor can choose between various fixed deposit types depending on his investment needs. Here are the most common types of FDs available to investors:
- Regular fixed deposit: It is the most common type of fixed deposit. It is for people having a regular income who are looking for a high return on investment and security of the deposited money.
- Tax saving fixed deposit: This FD type offers a dual advantage to the investor. You can enjoy tax benefits, along with high returns under Section 80C of the Income Tax Act.
- Senior citizen fixed deposit: Senior citizens above the age of 60 years can enjoy additional interest returns on their fixed deposit investments.
A fixed deposit is an ideal investment scheme for people who want to keep their money safe but also want it to grow with time.