A fixed deposit is the investment of a sum of money for a specific duration with a bank or a financial institution. It generates a pre-defined rate of interest, which is often higher than that of a savings account.
Fixed deposits are available for different durations and the interest rates vary with the investment duration and amount. They offer guaranteed and attractive interest rates with minimal risk.
Key Highlights
- RBI data of 2023 indicates that there is ₹103 trillion approximately in FD accounts in India.
- The credit rating of the FD and issuer is crucial when selecting an FD for investment.
- Unlike most debt investments, FD offers a wide range of investment tenure.
- FDs can be redeemed on maturity of tenure, or reinvested - both principal and interest, or only principal.
Different Types of Fixed Deposits
While all fixed deposits are offered by banks and financial institutions for a specific duration, and against an interest income, they can be of various types. Some of the common types of fixed deposits are:
- Standard Fixed Deposits: Standard fixed deposits are available for different durations, ranging from seven days to 10 years approximately.
- Tax Saving Fixed Deposits: Investments in tax saving fixed deposits are eligible for tax deduction. The maximum eligible amount is up to ₹1,50,000 and the only duration option is five years. A one-time investment is eligible as tax-saving fixed deposit and without the option of premature withdrawal.
- Regular Income Fixed Deposits: If you want a monthly or quarterly payout of your FD interest income, a regular income fixed deposit is a suitable option. This fixed deposit allows withdrawal with little or no withdrawal charges.
- Corporate Fixed Deposits: These are fixed deposits offered by companies with a specific duration and interest rate. Such companies may also be non-banking finance companies and other financial institutions.
Smart Tip: Don’t forget to check the credit rating while investing in a corporate FD.
- Special Fixed Deposits: These fixed deposits are offered for a limited period and have a fixed duration. They offer a special interest rate.
- Flexi Fixed Deposits: These fixed deposits are created when the surplus amount in savings or current account is auto-swept to a fixed deposit as per the customer’s instructions.
- Cumulative Fixed Deposits: In this type of fixed deposits, the interest compounds quarterly and is added to the principal investment amount, leading to long-term compounding.
- Non-cumulative Fixed Deposits: In non-cumulative fixed deposits, the interest amount does not accumulate but is instead paid out to the investor at a regular interval.
Key Features of Fixed Deposits
Across its different types, fixed deposits have some common characteristics and features. It is these features that make it a popular investment in India. Key fixed deposit features include:
Guaranteed returns
The performance of a fixed deposit investment is not dependent on the market. Fixed deposits are the ideal investment option for conservative investors with a low risk appetite.
Flexibility of tenure
Unlike PPF and NSC, fixed deposits come in a wide range of tenures – starting from a few days to many years.
Interest income
Fixed deposits offer a higher rate of interest compared to savings accounts. You can enjoy a high-interest income on fixed deposits even before the age of 60 years.
Safety
Fixed deposit is a low-risk investment instrument where the safety of funds can be reviewed by the ratings provided by analytical companies such as CRISIL and ICRA.
Term deposits from Shriram Finance come with a rating of "[ICRA]AA+ (Stable)" by ICRA and "IND AA+/Stable" by India Ratings and Research.
The power of compounding
Even small amounts invested in fixed deposits can deliver high returns, thanks to compounding. Shriram Finance offers an additional 0.25%* p.a. interest per annum on the renewal of matured fixed deposits.
Point to note: If you are facing a sudden financial emergency, you can opt for a loan against your fixed deposits. Being a secured loan, it will command a lower loan interest rate
Other Investments and Fixed Deposits: A Comparison
Let us now compare some of the most popular investments instruments with that of fixed deposits.
- Fixed tenure of 15 years
- Premature closure allowed in exceptional circumstances—penalty applicable
- Withdrawal allowed only after seven years
- Fixed tenure of 5 years
- Premature withdrawal not allowed except in the case of death or on forfeiture by a pledgee who is a gazetted officer
- Fixed tenures of 1, 2, 3 and 5 years
- Premature withdrawal allowed six months after the deposit—penalty applicable
- Only ELSS has a three-year lock-in period
- Can be withdrawn without any restriction, although an exit load may apply in some cases
- Fully liquid and can be easily bought and sold in the exchanges
- Complete withdrawal allowed if the corpus is less than Rs 2.5 lakhs
- For a higher corpus only 20% allowed as a lump sum withdrawal; remaining 80% must be used to purchase a monthly pension annuity
FAQs
1. How do fixed deposits compare to other common investment options in India?
Like debt investments, fixed deposits offer a moderate and safe rate of return but with more flexibility in tenures and withdrawal. Their return is low compared to the riskier market-linked products.
2. What are the key differences in risk and return between FDs and other investments?
FDs have low to moderate risk, as the chances of default are very minimal if you select a robust organisation for your FD. Sovereign-backed debt investments have an even lower risk. However, market-linked investments like mutual funds, stocks and even gold, to an extent, have a higher risk than fixed deposits.
3. What are the key differences between FDs and mutual funds and stocks?
Here are some of the key differences between FD and mutual funds and stocks:
• FDs provide a fixed return unlike mutual funds and stocks.
• The risk is nominal in FDs, moderate to high in mutual funds, and generally high in stocks.
• FDs don’t have any expenses, but mutual funds and stocks have expense ratios, brokerage, securities transaction tax, etc.
• Mutual funds and stocks are highly liquid, while FD has deposit tenure and withdrawal charges.
4. What is the liquidity factor when comparing FDs to other investments?
FDs are among the most liquid of all the debt investments, flexi FDs in particular. PPF, NSC, etc. have stricter withdrawal norms. Mutual funds and stocks are much more liquid. Like the FD premature withdrawal charges, mutual funds may have an exit load.
5. Are there any tax advantages or disadvantages of FDs compared to other options?
FDs don’t have a tax advantage unless it is a five-year tax saver FD. Some debt investments like NSC and PPF have tax benefits. ELSS mutual funds have tax benefits, but stocks and other mutual funds don't.