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 better 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 reliable and attractive interest rates with minimal risk.
Key Highlights
- Fixed Deposits remain one of the most widely used savings instruments in India.
- The credit rating of the financial institution is important when selecting an FD for investment.
- FDs offer a broad range of tenure options across institutions.
- FDs can be redeemed on maturity of tenure through the cumulative FD and recurring interest payment through the non-cumulative FD.
- FDs can be 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:
- Cumulative Fixed Deposits: In this type of fixed deposits, the interest compounded 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, as chosen by the depositor.
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:
Predictable Returns
The interest rate is generally fixed at the time of investment and remains unchanged for the chosen tenure.
Defined Tenure Options
FDs are available across a range of tenures, allowing investors to align maturity with financial goals.
Interest income
FDs typically offer better interest rates compared to savings accounts, subject to tenure and the financial institution's terms.
Not Directly linked to Market Volatility
Unlike market-linked instruments, FDs are not directly affected by daily market volatility. Reviewing credit ratings helps assess issuer strength.
The power of compounding
Even small amounts invested in fixed deposits can deliver high returns, thanks to compounding.
Point to note: If you are facing a sudden financial emergency, you can opt for a loan against your fixed deposits.
Other Investments and Fixed Deposits: A Comparison
Let us now compare some of the most popular investment instruments with those of fixed deposits.
FAQs
How do fixed deposits compare to other common investment options in India?
Fixed deposits offer a reliable and predictable rate of return but with more flexibility in tenures and withdrawal. Compared to market-linked instruments, FDs generally provide stable returns.
What are the key differences in risk and return between FDs and other investments?
FDs are generally considered lower risk compared to market-linked investments.
What are the key differences between FDs, mutual funds and stocks?
Here are some of the key differences between FDs, 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. - Mutual funds may charge expense ratios, and stocks may involve brokerage and transaction charges.
- Stocks and many mutual funds offer higher liquidity compared to fixed deposits.
What is the liquidity factor when comparing FDs to other investments?
FDs generally allow premature withdrawal, subject to penalties. Government savings schemes such as PPF and NSC have stricter lock-in conditions. Mutual funds and listed equities typically offer higher liquidity, although exit loads or market conditions may affect redemption value.