Fixed Deposit is also known as FD, is an financial instrument provided by banks and NBFCs to an individual and organizations to save funds and earn an interest.
Though it is similar to a savings account, it offers a higher rate of interest which remains steady for the FD tenor. Investors with extra funds can use the vehicle to earn guaranteed returns. The fixed deposit interest rate varies for tenors ranging from 7 days to 15 years.
An FD is one of the most secure and reliable investment vehicles in which to park funds for the short and long term.
Here are the Defining Features of Fixed Deposits
- It is the safest investment option as the interest rate earned is not affected by the market fluctuations.
- The amount of money accumulated grows with time, and at the end of the tenor, the depositor gets both the principal amount and the interest earned.
- Interest can also be earned as per the requirement of the depositor – annually, half-yearly, quarterly or monthly.
- A higher rate of interest is offered to the depositor in comparison to a savings account.
- Tenors can be chosen as per needs and risk abilities. However, premature withdrawal of partial or full amount is available.
- Facility to avail a loan again the FD is made available by most banks and NBFCs.
- Tax benefits of up to specified amounts are available for depositors.
- Individuals, organizations or a group of 2 or more people can opt for an FD.
- Senior citizens can avail a higher interest rate.
Fixed deposit interest rate is free from market fluctuations and offer best rates up to 9% enough to cover the rising cost of living. Moreover, as a depositor one must carefully compare the fixed deposit interest rates and study the credit ratings of banks, NBFCs or HFCs to gauge the credit and market risk involved in the investment.
The rate of interest of FDs will majorly depend on the amount deposited, duration of the fix and depositor type –
- Sum Deposited: Banks offer lower interest rate on bulk deposits of more than Rs. 1 crore and higher interest rate on deposits of less than this amount.
- Tenure: Banks provide lower rate of interest on the fixed with a shorter tenure. As per current rates, the highest rate on deposit with a tenure of less than a year is 7.75%. While, the highest interest rate on longest tenure of say 10 years is 9%.
- Depositor: All banks provide higher interest rate for senior citizens FD .This rate varies from anywhere between 3.50% to 9.15% depending on the amount and tenure.
While the features are separate the FD from other investment options, it is important to know how banks calculate the fixed deposit interest rate.
The rate of interest is dependent on fixed deposit amount and tenor. However, the interest rates given by the banks can be calculated as below:
- Simple Interest – Multiply the principal amount with the annual rate of interest and the tenor (in years)
- Compound Interest – Interest amount earned on the principal amount as well as the interest, in a defined time period
Instead of worrying about formulas and manual calculations it is a better idea to use a fixed deposit calculator.
Using the FD Calculator – A Step-by-Step Process
The FD calculator is one of the easiest and most accurate ways to know the interest amount you can earn on the principal amount you deposit for a pre-defined period.
Here, is the Process of Using it Explained in Simple Terms
- Enter the following details in their respective columns.
- Principal amount
- Rate of interest (calculated as a percentage)
- Tenor (choose from the option of days, months and years)
- Choose from the frequency options which range from a simple rate of interest, monthly, quarterly, half-yearly and annually.
- Click on calculate.
- Check the right-hand column which will show you
- Maturity amount
- Amount of interest earned
You can try the various combinations on the FD interest rate calculator to see which maturity amount meets your investment goals. However, before you go ahead and park your funds in an FD, it is important to know it various merits and demerits.
Like every other investment vehicle in which an investor wants to park their funds, the fixed deposit too has its advantages and disadvantages. They are discussed below to help you make an informed decision with regard to your investments.
Advantages of a Fixed Deposit
- It is a low-risk, safe modern investment option which is both safe and secure.
- The wide tenor makes it ideal for a small term as well as long-term investment.
- Once the interest rate is decided, market fluctuations have no impact on the interest to be earned during the entire tenor.
- The depositor is assured of getting the promised sum at maturity making the income steady and reliable.
- In case people want to earn an income on their FD, they can opt for monthly, quarterly, half yearly or yearly payments of their interest earned.
- Investors can take a loan against the fixed deposit in case the need arises before the tenor is complete. The rate of interest on the loan is usually low.
- Senior citizens are entitled to a higher rate of interest on their deposited amount.
- For a fixed deposit of five years minimum, the investor gets tax perks and they can also get the opportunity of availing the 80C tax deduction.
- The FD amount can be transferred from one bank to another, in order to get more dividends.
Disadvantages of a Fixed Deposit
- Since this investment scheme is not affected by market fluctuations, if there is an upswing, the depositor will not be able to enjoy the option of earning a higher return on investment.
- Even a small liquidation before maturity can earn a very low-interest rate and may require the investor to pay a penalty levied by financial institution.
- There are tax benefits for FD but when it comes to the returns, the amount is taxable.
Knowledge of features, advantages and disadvantages enables you to look at your investment goals and expected expenditures in the future before reaching a decision. But, once the decision is reached, the next step in knowing how to open an FD account.
Opening an FD account is a very simple process. It can be done both online and offline (by visiting a bank branch).
- Visit the financial institution’s branch.
- Meet the person authorized to take your FD as a deposit.
- Ensure you are meeting their eligibility criteria.
- Remember to carry all documents pertaining to eligibility and identification. Do not forget to carry photographs as specified.
- Duly fill the application form and attach all the required documents.
- Carry the cash or cheque which is to be deposited as FD. You can even make an online transfer at the branch. Don’t forget to use the Fixed Deposit calculator to know the amount you are entitled to at the maturity of the FD.
- Submit to the proper authority and take a receipt.
- The receipt is proof of deposit and is necessary to be shown at the branch when you want to liquidate before maturity or want to withdraw your funds at the FD maturity.
- Go to the financial institution’s website.
- Navigate to the fixed deposit page.
- Create a login ID and password.
- Click to go to the application form and fill it accurately.
- Ensure you are meeting their eligibility criteria
- Remember to have all your documents pertaining to eligibility and identification ready to be uploaded which also includes photographs in the required format.
- Follow the procedure specified to transfer funds for your FD. Before transferring recheck the online fixed deposit calculator to know the sum you are entitled to when the FD matures.
- Click on submit and note down the FD details shared.
- Use your login ID credentials to keep yourself updated on the FD status.
As is obvious opting for the online procedure of opening an FD is faster, smarter and easier. But you have to meet the eligibility requirements and deposit all documents to meet your investment goals.
If the criteria for eligibility and documents are not met, it can lead to a rejection of your application.
Here is a List of Eligible Entities who can Apply for a Fixed Deposit with a Bank or NBFC:
Resident Indian citizen: A Resident Indian Citizen is one who is residing in India for at least 2 out of the 10 years which precedes the current financial year.
Hindu Undivided Family (HUF): As per Hindu Law, Hindu Undivided family consists of all persons who are lineally descended from one common ancestor which also includes wives as well as unmarried daughters.
Sole Proprietorships, Partnership Firms, and Companies Including Group Companies: All these are business entities operating under one common name.
Clubs, Associations, and Societies: It can be defined as an association of two or more people having a common interest or goal.
Family Trusts: A family trust refers to a discretionary trust which is set up for holding a family’s assets or for doing a family business.
- Identity Proof – The most common identity proofs required are PAN card, Passport, Voter ID card, Driving License, Government ID or Ration Card. Senior citizens also require one of the above as their identity proof
- Address Proof – Apart from passport, financial institutions accept electricity bills, telephone bills, bank statement with a cheque, or a post-office-issued certificate and ID card.
You will also require the latest photographs – passport size, and check out if they are required in black and white or colored.
In the end, remember, even though you have to follow the rules and regulations as laid down by the financial institution, it is your hard earned money. You have to check the interest rate offered. Use the FD calculator to know the amount you will get at the end of the tenor. It is easy to use and with a few inputs will provide you with the correct calculations.