Safe investment option: What is a fixed deposit; how does it work

An amount deposited with a bank or financial institution must not be withdrawn prematurely

Fixed deposits are a popular way to invest money as they are safe and offer good returns in comparison to savings accounts. A fixed deposit (FD) is an investment in which an individual puts a lump sum amount with a bank or a financial institution for a specific period of time. The amount deposited earns interest at a fixed rate set at the time of account opening. FD holders can choose to receive the earned interest on a monthly, quarterly, half yearly or annual basis.

The return on a FD is guaranteed and there is no risk of  capital loss – unlike a market investment in which returns fluctuate over time. Once the amount has been deposited in a FD, it is unaffected by market fluctuations. Thus, the returns on your deposit are assured.

How does a fixed deposit work?

When individuals open a FD account, they deposit a specific sum of money for a period varying from seven days to 10 years. The amount should not be withdrawn until maturity.

The interest rate offered on a FD is influenced by both the investment period and deposited amount. Longer investment duration results in a higher interest rate. The interest earned is either credited to the investor's savings account – many banks mandate FD holders to maintain a savings account – or reinvested in the FD at the end of the agreed-upon tenure.

Such deposits come in various types: Regular FDs for standard investments, monthly recurring FDs, tax-saving FDs, senior citizen FDs with higher interest rates, flexi FDs offering deposit flexibility, corporate FDs by non-banking entities, and FDs for children.

Recurring deposits

Recurring deposits are suited for individuals with a consistent salary or those with a modest annual income. Individuals have to deposit a fixed portion of their income monthly for a set period. After maturity, the principal amount is returned along with the interest earned. The requirement to make regular deposits also helps one to develop a savings habit.

Factors to consider

Begin by comparing the interest rates offered by different banks, select an option that gives the best return.

Evaluate the lender’s credibility by examining the safety measures associated with the fixed deposit

Research the reputation and financial stability of the bank to make an informed decision

Choose a bank that has a good customer service