Fixed Deposits (FDs) are among the commonly used savings instruments in India. They allow individuals to deposit a lump sum amount with a bank or Non-Banking Financial Company (NBFC) for a fixed tenure at a predetermined rate of interest. Since the rate of return is defined at the time of investment, FDs provide clarity regarding the maturity amount, subject to the applicable terms of the scheme.

Fixed deposit schemes are available across different tenures and payout structures, which may vary from one financial institution to another. Understanding how these features work is important before selecting a suitable option. This article explains the fundamentals of fixed deposits in India and highlights key aspects that investors should be aware of before investing.

What is a Fixed Deposit (FD)?

A fixed deposit is a financial instrument in which an individual deposits a lumpsum amount of money for a fixed period at a fixed rate of interest offered by the financial institution. Unlike a regular bank account, where funds can be withdrawn at any time, FDs require the amount to remain invested for the chosen tenure. In return, the depositor earns interest at a predetermined rate.

At the end of the tenure of a cumulative FD, known as the maturity period, the depositor receives the principal amount along with the interest earned. Or if the depositor opts for non-cumulative FD, the interest is paid at the chosen pay-out frequency.

Types of Fixed Deposits

Here are the two types of fixed deposit schemes that you can choose from–

Cumulative fixed deposit

A Cumulative Fixed Deposit offers compounding benefits to its holders. In this scheme, you get both the accumulated interest and principal on maturity. Instead of paying the interest to you periodically, the financial institution reinvests it in the same FD. It enables you to earn interest on interest. A  cumulative fixed deposit  is feasible for those who are not looking for periodic payouts from their investments.

Non-cumulative fixed deposit

A Non-cumulative Fixed Deposit provides the option to receive interest at regular intervals instead of compounding it until maturity. The depositor can typically choose the pay-out frequency — such as monthly, quarterly, half-yearly, or yearly, depending on the scheme terms. Since the interest is paid out periodically and not reinvested, the overall maturity amount may differ from that of a cumulative deposit of the same tenure and rate.

This option may be considered by individuals who prefer periodic cash flow from their investment, like retirees.

Pros of Investing in Fixed Deposit

Fixed deposits offer certain features that may make them suitable for specific financial needs:

• They are generally considered relatively stable investment instruments, as the returns are predetermined at the time of investment.
• They provide fixed interest earnings that are not directly linked to market fluctuations.
• They come with a defined tenure. You may also get renewal options upon maturity.
• Depositors can choose the interest pay-out frequency, such as monthly, quarterly, half-yearly, yearly, or at maturity, depending on the scheme.

Cons of Investing in Fixed Deposit

Like any other investment instrument, fixed deposit plans do have their share of disadvantages –

• As a debt-based instrument, the return potential may differ from market-linked investments such as equities.
• Premature withdrawal generally attracts penalties or a reduced rate of interest, as per the institution’s policy.

How to Choose the Right Fixed Deposit Plan for Yourself

Choosing a suitable fixed deposit (FD) plan depends on several factors, including your financial goals, income needs, and investment horizon. Since different institutions offer varying terms, it is important to evaluate the following aspects before making a decision:

1. Interest rate:

FD interest rates vary across financial institutions, and may differ depending on tenure and depositor category. Comparing the applicable rate for your preferred tenure can help you estimate the potential maturity value. Investors should review the latest rates directly from the financial institution before investing.

2. Minimum FD investment:

Most financial institutions specify a minimum deposit amount. This threshold varies across financial institutions. Understanding the minimum investment requirement helps in planning the allocation of funds effectively.

3. Tenure:

The tenure refers to the period for which the funds remain invested. Tenure options may range from short-term to longer durations, depending on the institution. Selecting an appropriate tenure should align with your liquidity needs and financial objectives. Locking in funds for a longer period should be considered carefully, especially if you anticipate needing access to the funds earlier.

4. Auto-renewal facility:

Many institutions offer auto-renewal or rollover facilities to the depositors. It enables them to reinvest the maturity amount into an FD with similar terms and tenure. This facility ensures that you do not lose out on interest earnings. However, most financial institutions require investors to specify auto renewal instructions at the time of booking the FD. Check the specific policies with your chosen bank or NBFC.

5. Premature withdrawal facility:

Fixed Deposits are intended to be held until maturity or as according to the chosen payout frequency. However, many institutions allow premature withdrawal, subject to certain conditions. This typically includes a penalty or a reduced rate of interest. Reviewing these terms in advance can help avoid unexpected adjustments.

6. Interest payout frequency:

The interest payout frequency option is available only for those choosing a non-cumulative fixed deposit. In such cases, depositors can choose to receive interest at regular intervals, such as monthly, quarterly, half-yearly, or annually, depending on the scheme. Cumulative fixed deposit holders get the accumulated interest on maturity along with the principal.

7. Nomination facility:

Most institutions provide a nomination facility, allowing the depositor to designate a nominee who can receive the proceeds in the event of the depositor’s demise. Ensuring that nominee details are accurately recorded at the time of opening the FD is an important administrative step.

Conclusion

Fixed Deposits remain a widely used savings instrument for individuals seeking defined returns over a fixed tenure. However, selecting the right plan requires careful evaluation of factors such as interest rates, tenure options, payout structure, and premature withdrawal terms. Reviewing scheme-related documents and understanding the applicable conditions can help in making an informed financial decision.

Shriram Finance offers Shriram Unnati Fixed Deposit with flexible tenure options and interest payout structures, subject to applicable terms and conditions. Investors are advised to review the latest interest rates, eligibility criteria, and scheme details before investing.