A fixed deposit is a way to save money, and also the best investment instrument in India.
Not everybody can successfully save money all the time. However, saving money is one of the most important aspects of building wealth. Saving a small portion of your earnings helps you enjoy a quality life.Â
People who spend money wisely and develop the habit of savings, it could grow wealth exponentially. There are various ways to save money today. A Fixed Deposit is one, and it is still the most sought-after investment instrument in India.
What is a fixed deposit?
A fixed deposit, also known as an FD, is an investment instrument offered by banks, as well as non-banking financial companies (NBFC) to their customers to help them save money. With a Fixed deposit you can invest a sizeable amount of money at a predetermined rate of interest for a fixed period. At the end of the tenure, you receive the lump sum, along with an interest. However, this is true only if you opt for a cumulative Fixed Deposit. You also have the option of choosing non-cumulative FDs in which you earn interest income on a monthly or quarterly basis.Â
You can choose a fixed deposit for a period ranging from minimum 7 days to maximum 10 years. This is why an FD is sometimes called a term deposit. When you open a fixed deposit account at a specific interest rate, it is guaranteed, for the rate of interest remains the same, irrespective of any changes, which happen due to market fluctuations.
The interest you earn is either paid at maturity or on periodic basis depending on your choice. You are not allowed to withdraw the money before the maturity. If you want to, you have to pay a penalty.
Therefore, Investors typically prefer to invest in Fixed deposits as it is safe and straightforward. Once you deposit your lump sum money, you keep earning a fixed interest amount. You get guaranteed returns on your deposit and there is no apparent risk of losing your principal amount.Â
Features of Fixed Deposit
To know what is a fixed deposit clearly, you need to know its prime features. Here are the significant ones:
- Secure Investment: The returns of a fixed deposit are guaranteed. You will get the same return agreed at the time of opening an FD. Most market-led investments are subjected to changes over time. Conversely, Fixed Deposits are more secure and reliable. This is because the returns generated by FDs are fixed. They are not affected by market volatility and remain static, at least for the investment tenure. This makes the fixed deposit more secured than any other investments.Â
- Return on Investment: The interest you earn on the fixed deposit depends on the maturity period or tenure of the FD. With a higher tenure, you earn a higher interest. Moreover, the returns you get on your investment depends on whether you opt for receiving the interest periodically or reinvesting the interest, which is called a cumulative FD. You gain the benefit of compounding with this FD
- Offers Flexible Tenures & Renewals: FDs can be held for tenures lasting for a week to 10 years. You can choose your preferred term at the time of opening the FD. You can just as conveniently renew the FD on maturity, but remember to check the interest rates, as they may be different.
- Loan against FD: You can avail a loan against your fixed deposit in case you are in urgent need of funds. This saves you from closing your FD prematurely.
- Tax Deduction: The interest earned on the principal amount is subjected to a tax deduction under the Income Tax Act,1961. You can calculate FD interest income in the 'other income sources' category while filing your returns.
Eligibility criteria and documents required:
Anyone can invest in fixed deposit if they meet the basic criteria mentioned below. You will need document to complete your investment process if you meet the eligibility criteria.
|Eligibility criteria:||Document required:|
|1. Resident Indians ||1. PAN|
|2. Sole proprietorships firm||2. Any KYC document: Aadhar/Â Â Passport/Driving license/ Voter ID|
|3. Partnership firms and companies |
|4. Hindu undivided Families (HUFs)|
|5. Clubs, Associations, Societies and family trusts.|
A Fixed Deposit is an excellent investment option if you are looking for guaranteed returns and do not wish to put your money at risk. Moreover, you can use your FD as collateral if you need a loan from your bank.