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Everything about fixed deposits

In recent times, the importance of savings has compounded. Hence, today, we thought of educating our young readers about one of the most common and secure instruments of savings called Fixed Deposits.

Before, you feel that you know everything about FDs and hit back, give us a chance. With this article we intend to cover the basic features of FD, what you must look before investing in one, average FD rates in the industry and how does FDs help in financial planning. We will also briefly cover how the pandemic has impacted the FD rates in India.

In resonance with your previous knowledge base, fixed deposits is an instrument that allows you to earn interest from banks and non-banking financial institutions by depositing a principal amount with them for a fixed period of time. Individuals lacking bank accounts can also avail of fixed deposit investments through post office accounts. The interest payments are normally compounded quarterly but for senior citizens, it may be monthly as well. The interest payments earned through FDs are much higher than those earned from a regular savings account as with FDs, you make a commitment to not withdraw the money for a given period of time, and thus the banks invest that money elsewhere (mostly loans) to make more money. This opportunity that you provide to the banks is what yields the interest payments. The FD tenure may range from 7 days to 10 years and the interest rates depend on this tenure itself - longer tenures would mean more long term investments by banks resulting in higher returns to banks and thus to the depositor. Interest rates offered to senior citizens are higher by 0.25%-1% so as to promote more savings by them that could assist their old age and thus more interest earnings for them.

These interest rates on fixed deposits are used as a regulatory tool by RBI to promote savings in the economy at the time of inflation. What happens in inflation is that the money supply becomes greater than needed, thus declining the value of money and now for every commodity, more money needs to be paid. This is what we perceive as inflation. To curb this increased supply, RBI starts to promote savings, by providing high-interest incentives which means that now you can make more money by depositing your earnings in FDs whereas on the other hand, with high-interest rates, loans become costly. An opposite scenario is being witnessed right now where to make loans cheaper in the COVID crisis, the government has decreased the interest rates but then this has impacted the senior citizens whose major source of income has been these interest payments and now those earnings would reduce. And if you suggest that we may keep different federal rates for both of these then that isn’t possible as the interest earned from loans is the interest paid for FDs and any imbalance will have to be borne by banks.

Coming back to the topic, there are several types of FDs available in the market and you must know about them. These can be tax-saving FDs whose objective is clearly to save taxes but here the maximum amount that should be deposited is 1.5 lacs per year and the lock-in period is a minimum of 5 years. In tax-saving FDs, you can’t withdraw the money before the maturity period while in other kinds, there is still an option to break the FD midway (with some penalties). Then, if your objective is to earn regular income through FDs, you must opt for non-cumulative FDs where you receive interest payments monthly, quarterly or bi-yearly as you may request. Under cumulative fixed deposits, you receive the principal amount and the interest payments at the end of the maturity period. The list goes on..

These are the rates that are being offered by major financial banks in 2020. With this in perspective, let’s work it out.

Let’s say that you just joined a company as a fresher and earn about 6 Lacs per annum which would mean 50,000 per month. We would suggest starting to put at least 10% of your monthly income into FDs i.e. 5000 in this case, for atleast 24 months. Now, the interest rates compounded quarterly is 6% for SBI and in that case, our interest earnings would be 632.46 at the end of the maturity period. Now, for every month for 24 months, if you make this investment, you would earn 632.46*24= 15,179. As the amount and tenure increases, your earnings would also increase. We would suggest our readers to create different FDs of 5000 each month rather than adding to the old FD as it mitigates the risks if you had to break FD for a small amount in the future.

So, concluding, that is majorly how FDs work and help you earn. They are one of the most secure instruments but you may also explore other instruments like Mutual funds, stocks, and derivatives but they are subjected to market risks. In fact, one more point that you may take loans against FD’s and they are available at cheaper rates than your regular personal loans.

We hope this was a good read and helped you gain clarity.

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