Fixed Deposits are a popular way of investing in India. They are a very safe investment and offer good returns. Most banks offer FD at interest rates of around 6.6% to 7.4% a year.
You invest money in a bank or NBFC. The bank pays a specific rate of interest for the duration of the fixed deposit. The FD principal (amount deposited) is returned to you, at the end of the tenure. Fixed Deposits are also called Term deposits.
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The fixed deposit rates are decided at the time of opening the deposit. The interest rates depend on the bank and the term you wish to stay invested. You receive the invested amount and compound interest.
See Also: Fixed Deposit Interest Rates 2019
FD offers guaranteed returns. These investments are safe unlike market-linked investments. What if interest rates fall after you open the FD? Well, you continue to receive the interest rates decided, when you made the investment. FDs are safer than stocks and equity mutual funds.
The returns from FD depend on interest rate and type of deposit. Opt for monthly or quarterly interest pay-outs or even the reinvestment option. You enjoy the compounding benefit. You can check Return on Investment using the FD Calculator available on many websites.
See Also: What are Fixed Deposit Accounts?
FD Tenure: The tenure ranges from 7 days to 10 years.
Loan Against FD: You can avail a loan against FD. Loans are offered in the form of overdraft and you can avail 80-90% of FD amount. You continue to earn FD interest and you don’t have to withdraw FD prematurely. (You save on premature withdrawal penalty).
The 5 year tax saver FD is a type of fixed deposit, which helps you enjoy tax deduction up to Rs 1.5 Lakhs a year under Section 80C.
Tax saver has a lock-in period of 5 years. Interest earned is taxed and interest ranges from 5.5% to 7.75%.
The RBI has been cutting repo rates in recent times. The repo rate currently stands at 5.75% after RBI reduced the benchmark repo by 75 basis points from February 2019. With market rates falling, Banks would soon cut FD rates. It would be wise to invest in FDs immediately, before interest rates fall down. Just make sure that FD investments are in-line with financial goals. If your investment horizon is medium to long-term, lock in to a long-term FD right now.
Banks use the money collected from FDs to offer loans. In recent times loan growth (credit growth) has been faster than deposit growth. As banks need depositor’s money (The money raised from FDs) to meet loan growth, they are not reducing FD rates. However, RBI is taking measures to improve liquidity at banks. This means FD rates would eventually fall.
Even as borrowers enjoy lower interest rates on home loans and other loans, depositors get lower returns from FDs. This is sad as FDs are preferred by many investors for safety and guaranteed returns.
RBI has moved from a neutral stance to an accommodative stance. This means FD interest rates are going down. Lock-in to long-term FD if investment horizon is medium to long term. What if you have a time horizon of 1-3 years? Well, invest in a flexi-FD for withdrawals less than a year. This is similar to recurring deposit but instead of single fixed installment each month, you can vary the installment amount and even the number of monthly installments, within the annual sum defined. Invest in normal FD for time horizon of 2-3 years.
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