Most of us have believed at some point of time, that fixed deposits is a safer Investment bet viz-a-viz other investment options. It is undoubtedly the safest and simplest investment option available.Today, let us understand some simple facts about fixed deposits. Fixed deposits (FD’s) assures us a good rate of return with a decent amount of flexibility.
What is a fixed deposit?
In case of fixed deposits, you deposit a lump sum of money called as Principal in the bank, at a certain rate of interest for a fixed period of time. At the end of the period, the bank returns to you, the principal amount along with the interest earned. The interest rate and tenure is specified at the time of opening the FD. The interest remains constant throughout the tenure of the FD, irrespective of the movement in the market interest rates. For e.g., if you have invested Rs.10000/- at 10% for 5 years, then at the end of 5 years you will be paid Rs.16105/-.
Advantages of FD’s are listed below:
- FD’s are a safe and reliable way to grow your wealth.
- Surplus cash in your savings is automatically moved into FD’s.
- Interest rates is normally higher than the inflation rate.
- Senior citizens get a higher rate of interest.
- Fixed deposits are fairly liquid and can be easily converted into cash, by incurring a small penalty.
- Normally banks offer loans against your FD’s in that bank.
Disadvantages of FD’s are listed below:
- Rising inflation could decrease the value of your fixed deposit investments. For e.g. If you had invested in FD’s when the inflation was at 4% and it reaches 6% by the time your FD matures, the value of your investment is automatically reduced by 2%. In this case, the returns from fixed deposits may not be very good.
- Your money could be locked in for a long period of time.
- Any interest earned above Rs 10000/- is taxable at source. If you are a senior citizen, you can get tax exemption by filling Form 15H. Others can get a tax exemption by filling Form 15G.
- In case of a premature withdrawal, penalty interest is levied at around 1%.
Some of the different types of fixed deposits are:
Flexible fixed deposit scheme.
In this type of fixed deposit, you can withdraw a part of the deposit before the maturity date. You can withdraw only the amount you need and the rest of the amount continues in the fixed deposit. This ensures that you do not lose out on the benefit of the interest that the fixed deposit offers.
Saving plus account.
In this case, the surplus cash kept in the Savings Account is moved to a FD for a specified period. For e.g. you can ask the bank not to keep more than Rs.20000/- in your Savings Account. Any amount more than the identified limit, will automatically be diverted to a FD, with specific instructions given to the bank. This amount will earn a higher rate of interest than the amount lying in the Savings Account.
Deposit with Overdraft facility.
In this type of fixed deposit, you can get an overdraft facility for your Savings or Current Account. For e.g., if you have created an FD of Rs.1 lakh, then the bank will transfer an amount of around 75% to 80 % of this deposit into your Savings Account and you can withdraw it. You will have to pay the interest for the used amount only.
These are few possibilities available with a fixed deposit account.
Apart from banks, even the Post Office and many private companies, Financial Institutions and public sector companies, offer deposit schemes like Fixed Deposits. Some of them are listed below
Post Office time deposits.
The Post Office also offers fixed deposits for 1, 2, 3 and 5 years for individual and joint accounts. Fixed deposits for 5 years have tax benefits under sec 80C. The minimum amount is Rs.200 with no maximum limit .
Government or corporate bonds.
Government bonds and bonds issued by private companies are similar to fixed deposits. These bonds offer a Fixed Rate of Interest, for investments made for a fixed period of time. The only difference in the case of corporate bonds is that they are not totally risk free. You will have to study the company ratings, its policies, investments and other future prospects. This will help you in making your decision of investment.
These are some of the simple and easy facts about fixed deposits in India.
Please read our earlier article on Mutual Funds.
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