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Fixed Deposit: What is no one talking about?

Posted: 3rd February, 2022

Updated: 8th February, 2023

Written by -

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Banks offer a common denominator of interest in the money you store in bank accounts. Most of the gain is cut off by the maintenance and other charges that banks deduct from the account. What can be another safe option that offers decent returns with minimal hidden charges in it?

One standard answer can be Fixed Deposits, commonly known as FD. As the name suggests, it is a system that takes a fixed amount and deposits it, only returning it after the term period is complete. Many aspects play a role in a Fixed Deposit; we will look into them one by one.

Firstly, it's interest: After a set standard time, you earn interest on your deposit. For instance, you have given a 6% return in a year on a deposit of INR 4,00,000/- with an interest that compounds quarterly (four times in a year).

This means that you will receive the interest four times a year. Compounding effect, which Albert Einstein famously called the eight wonders of the world, would massively impact your Fixed Deposit. Due to the compounding of Interest quarterly, you will have INR 4,24,525/- by the end of that year.

If it were just simple interest that did not compound, you would've made 4,24,000/- by the end of the year. Now, it can be said that the difference here between simple interest and compound interest is around 500.

But, this is because we have only considered a time frame of one year. However, if you were to take the same example for a time frame of 7 years, this would happen.

Deposit amount (at the very beginning)- INR 4,00,000/-

Interest Rate - 6%

Compounds quarterly every year

The amount you would end up with after seven-year or quarterly compounding with an initial investment of 4,00,000 rupees would be INR 606,888.8/-

  1. Simple interest of 6% every year

    The amount you would end up with after simple interest once every year would be INR 5,68,000/-

    Now the difference is noticeable. That small gap of 500 rupees amounts to an opening of 38,000 rupees. That is the power of compounding.

  2. Amount to deposit

    In today's time, one can deposit as low as ten thousand rupees via an investing app and have their fixed deposit. Usually, people put a good chunk of their investing money into Fixed Deposit as it is safe, requires significantly less paperwork and documentation, and has easy tax accounting.

  3. Time

    A Fixed deposit can be short as six months and as long as 10 years. It is mathematically better for one to go for an extended period as money would compound more and do all the work for you if you are willing to stay patient and not break the Fixed deposit.

    One still may have the option of premature withdrawal in a Fixed Deposit, meaning they can withdraw the amount before the Fixed deposit completes its full term. It is very highly advised that one asks the deposit consultant about such questions and reads the documents of the scheme very carefully.

  4. Taxation

    Tax is deducted at Source by the Tax provider. The interest income is also taxable in India. For further understanding, read the documents of the scheme you are choosing.

    Lastly, it is essential to note that there is a separate viewing of Fixed Deposits for Senior citizens. Their tax rates and ways of working differ in many aspects.

Summary:

The compounding aspect of safe investments like Fixed Deposits should be used to full utility. One should study the basics of Fixed Deposits thoroughly and get started with the investments by clearly reading said documents of the scheme and speaking to consultants.

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