What is Fixed Deposit (FD)?

Fixed deposit is a type of investment in which fixed amount (Principal) is invested for specific period of time in a bank or investment company with fixed rate of interest (roi). The invested money is blocked for the tenure selected and there is a penalty charged if this amount has to be withdrawn before tenure is over i.e premature closure. However some banks or companies may or may not charge this penalty. It solely depends on policies of the governing bank or company. Fixed Deposit (FD) scheme is low risk based investment option as it has no linkage with market volatility. By choosing interest credit option on monthly or quarterly basis one can see this as systematic way of earning money on regular basis with trivial risk. This scheme offers interest credit option on quarterly, semi-annually, annually or lump sum at the time of maturity. Interest credit as a lump sum at the time of maturity is more beneficial as capital invested and interest earned both are compounded.

What are main highlights of Fixed deposit scheme?

  • Whta are Benefits of Fixed deposit?

    • Fixed deposits investment scheme has minimal risk as there is no linkage to the share market volatility.
    • If you have medium to large amount which is nearly unused in your bank account then this offers good option to earn some more money over it as bank pays you interest over this amount. You can earn money on monthly basis by selecting interest credit option as monthly. Your capital is still untouched and you earn extra money over it.
    • A good investor should distribute the savings into various investment options. There are many other options available which are similar to Fixed deposits such as Lump sum investment in mutual funds, investment in shares, bonds, buying insurance policies, gold saving etc. But these options has some linkage over market volatility or they are having medium to high risk which either blocks your money more than tenure you desire or you loose some money if things does not turn to be in your favor. However FD can give you money with minimal risk and there are no chances of loosing the hard earned money. Thus, it is better if money is distributed amongst many options with respect to risk bearing capacity of individual investor.
  • How to open fixed deposit?

    • Term deposit account of investor is opened at the bank by submitting a hard copy of application form at the branch. Some banks offer account opening as a online process if investor already has any other type of account associated with bank.
    • Bank fixes the rate of interest applicable. (It can vary with tenure selected).
    • Investor has to choose principal (one time investment or lump sum) amount and tenure.
    • Investor can specify interest credit option as monthly, quarterly, annually or as a lump sum at the time of maturity. (This is as per governing bank or investment company.)
    • When tenure is over, bank pays back the principal amount and the interest earned to investor account. If interest credit option is not lump sum at maturity then interest is credited on monthly or quarterly basis over tenure selected in given bank account. At the time of maturity only principal amount is payed back.
  • Example of FD investment:

    • Let us discuss further with real time example. An investor has 500,000.00 amount in his bank account and it is unused or he does not require it for 1 or 2 years. This money is invested in the Bank FD (Fixed Deposit) scheme with tenure of 1 year and rate of interest (roi) as 5.75 % per annum with daily compounding. Investor has chosen interest credit option as monthly basis. You can use our FD calculator to compute it yourself. So investor has paid 500,000.00 to bank and bank will return it back after 1 year. So doing the compound interest calculation for principal amount of 500,000.00 @5.75 % per annum and tenure as 1 year with compounding as daily, investor earns 29,590.24 as total interest in 1 year. So he will receive 29,590.24 / 12 = 2465.86 as monthly amount from bank as interest credit. Please refer below image from our calculator screen. Fixed deposit calculation Image.