What is a fixed deposit?
Fixed Deposit is a kind of savings account or certificate of deposit that pays a fixed rate of interest until a given maturity date. Funds placed in a Fixed Deposit usually cannot be withdrawn prior to maturity or they can perhaps only be withdrawn with advanced notice and/or by having a penalty assessed.
When should I open a fixed deposit?
- If you have a good amount of money kept in a Savings Account. With a short-term deposit of just a few months, you might earn more than what you could if the money is left in a Savings Account.
- Interest rates offered on FDs are higher than those offered on Savings Accounts so helping your money grow in a term deposit is the more lucrative option.
- If you have a large sum of cash which you intend to use to buy something in a month or two. If you put that money in an FD
- If you don’t have a credit history and want to create one, you should use an FD as collateral to secure the loan.
- You can even use a Fixed Deposit to get a Credit Card. Some banks may charge considerably lower interest rates for Credit Cards secured by FDs.
- If you, as a depositor, are looking for tax benefits then FDs are the ones to will give it to you via their tax-saving schemes.
What are the advantages of a fixed deposit?
There are many advantages of a fixed deposit. To name a few.
- Guaranteed and higher returns: Fixed deposits provide guaranteed returns on investments which is suitable for short pay term as well as a long-term investment. The rate is generally between 7%-8%. The interest also depends on the tenure of F.D. long the term FD accrues better the interest gains.
- Flexible interest rate pay-outs: Interest can be paid at different intervals depending on the term you choose. Interest rates are paid at maturity, annually or monthly. Monthly and annual interest rate pay-out ensures that you have the extra income flow and can be reinvested for higher maturity benefits.
- Encourages Savings: A fixed deposit account holder will unintentionally save money, since FDs require the depositors to invest a sum of an amount for a fixed period of time. Premature withdrawals attract penalties. Fixed deposits require you to keep the amount until a given maturity date. This encourages the saving habit of an individual. He will not be tempted to spend the money and find a way to manage his finances more efficiently
- .Safe Investment: FDs are risk free investments. Unlike other investment tools like mutual funds, FDs are not affected by change in market. It also doesn’t change the rate of interest till the time of maturity thus, you get an assured sum of money at the end of the maturity period.
- Liquidity: An asset is liquid when you can easily convert it into cash. FDs are liquid. Although the holder will be charged a penalty, The amount that is invested in fixed deposit can be withdrawn at any time for a small penalty. The investor may have a financial emergency to meet financial needs. The penalty is less than that of selling stocks or real estate as the asset cannot be sold easily because of its high value and if you are in a distressed situation, you will sell it for a much lower rate. Whereas, fixed deposits can be withdrawn at any time and all you lose is a certain interest income.