When you make a deposit in a bank for a predetermined tenure at a fixed rate of interest, it is known as a Fixed Deposit or FD. As a financial instrument, Fixed Deposits have been tried and tested for a significant period of time and have consistently delivered good returns. This makes them one of the safest options when it comes to investments. Also, FDs are a good starting point for someone who is investing for the very first time.
Benefits of Fixed Deposits (FDs) in India
There are plenty of reasons why Fixed Deposits are one of the most popular financial products in India. Here are some of the major benefits of Fixed Deposits in India:
- Get Guaranteed Returns. The return on investment is guaranteed. Irrespective of the amount you have deposited in an FD, it will earn you interest at the interest rate prevailing at the time of making the deposit. Market fluctuations are not going to impact the returns on your investment. This is probably the reason why most experienced investors still like to keep a part of their investment in Fixed Deposits
- Determine Your Tenure. The tenure for Fixed Deposits is very flexible. It ranges from 7 days to 10 years, depending on the customer’s requirements. You can have multiple Fixed Deposits in the same bank at the same time for same or different tenures. You will receive a separate receipt for each and every FD.
- Make More Profit. The rate of return on fixed deposits is much higher when compared with a savings account. The interest rates change based on the tenure of the Fixed Deposit. Most of the times, the interest rate is higher for FDs of a longer tenure. There are a few exceptions since the banks set the Fixed Deposit interest rate based on their anticipation of the repo rate (the interest rate at which RBI lends money to the banks). If a bank feels that the repo rate will rise after 5 years, the FDs with tenure of over 5 years will have a lower interest rate than one with a 3-year tenure.
- Choose the Mode of Interest Payment. The customer can choose the frequency of interest they wish to receive, be it on a monthly, quarterly, or yearly basis. This will end up as another source of income for the customer. Alternatively, they can opt for a Cumulative FD in which the interest is reinvested into the FD delivering even better returns.
- Better Interest Rates for Senior Citizens. One of the primary reasons why Fixed Deposits are so popular among senior citizens is because of the higher interest rates. The rate is generally better for FDs as compared to savings accounts and the rate of interest for senior citizens is higher (at least 0.50%) as compared to other customers.
- Avail a Loan Against Fixed Deposit. If you need money urgently, it is easy to take a loan against your Fixed Deposit. The customer can borrow up to 90% of the principal amount of the fixed deposit. The customer keeps on earning interests even if he avails a loan against the FD. This interest can help you repay your loan much more easily.
- Deal with Urgent Cash Crunch Situations. During the time of emergency, the fixed deposit can be broken and the money can be withdrawn. Banks charge a small amount as a penalty for breaking a Fixed Deposit prematurely. However, it is not a smart option to go for. It is advisable to opt for a loan against Fixed Deposit instead of breaking the FD prematurely. The interest earned on the FD reduces the interest outgo on the loan. In addition, customers do not have to pay any penalty, among others expenses that come up.
- Joint Fixed Deposits: Many people do not know that they can have a Fixed Deposit along with their spouse, children or parents. However, it must be remembered that in case of premature withdrawal or application for a loan against Fixed Deposit, all FD holders need to sign the application form.