A conventional fixed deposit or FD account is an excellent investment option to reserve and maximize a part of your savings through accrued interest. An FD account offers a uniform rate of interest, which is more reliable than most mutual funds or equity investments. Individuals belonging to any age group can opt for a Fixed Deposit account; however, the rate of interest offered to senior citizens is comparatively higher than account holders from other age groups.
Therefore, fd accounts are suitable for senior citizens and risk-averse investors who wish to invest their money in safe investment opportunities, which remain relatively unaffected by market volatilities. Mainly, Fixed Deposit schemes offer the dual benefits of fund safety and an additional source of income for investors. Here is an insight into the different types, and advantages of a fixed deposit scheme.
What is a Fixed Deposit?
In India, different non-banking financial companies (NBFCs) and banking institutions such as Axis Bank offer fixed deposits or FDs, which are a form of term deposit accounts. Individuals deposit money in these accounts and receive a higher rate of interest rate than any other traditional types of investments such as savings account.
Typically, investment tenures for fixed deposits range between 7 days to 10 years, while the rate of interest may remain fixed or vary throughout the tenure. Once you invest your money in an FD account, you will receive the maturity corpus at the end of the investment term.
Here, it is crucial for you to know that after you lock the amount for a fixed period ion an FD, you cannot withdraw the corpus before maturity unless you agree to pay the penalty for premature withdrawal.
Types of Fixed Deposit Accounts
Investors can select from a variety of fixed deposit account options, as per their financial needs and personal goals. Different types of fixed deposits include:
Standard Fixed Deposits
These types of term deposits are one of the most fundamental and straightforward forms of investment. Under these accounts, investors deposit a fixed sum of money for a specific period and accrue interest on the deposit sum. Features of standard fixed deposits include:
- Fixed tenure
- Standard interest rates
- Investments unaffected by market volatilities
Tax Saver Fixed Deposits
Tax saver fixed deposits usually have a longer investment tenure, ranging between 3 and 5 years, or more. Hence, these deposit schemes have a lock-in period, and investors cannot make premature withdrawals unless the account holders demise happens before the lock-in period expires. The primary advantage of these accounts is that you can claim up to Rs. 1.5 lakh as tax exemption under Section 80C, on your fixed deposit investment.
Cumulative Fixed Deposits
Unlike standard fixed deposit schemes, the interest earned on cumulative fixed deposits is not available at regular intervals. Instead, the interest will only be paid, along with the principal amount, upon the completion of the investment tenure. The interest is compounded on a yearly, half-yearly, quarterly, monthly, bi-weekly, or weekly basis.
Flexi Fixed Deposits
Under Flexi fixed deposit (Flexi FDs) schemes, investors can link their savings account to the FD account.
Advantages of Fixed Deposits
Ease of Investment
Investors can open an FD account online within a few minutes. You can compare between different FD schemes using an online FD calculator and choose the scheme that offers maximal interest rate with minimum documentation.
Assured Returns
Fixed deposit (FD) accounts provide guaranteed returns on your investment. Therefore, these investments are relatively risk-free when compared to other forms of investments, such as mutual funds or debt funds. Instead, investors receive a fixed rate of interest on the amount invested.
Higher Interest Rates
Fixed Deposit accounts offer a higher rate of interest rate than other forms of traditional investments such as savings accounts and recurring deposits.
Tax Benefit
Investors can opt for tax saver fixed deposits to avail tax benefits up to Rs. 1.5 lakh, as prescribed under Section 80C of the Income Tax Act 1961. However, most FDs providing tax saver benefits have a lock-in period between 3 to 5 years.