Understand and Learn about Fixed Deposit

Fixed deposits are a very popular investment option in India. Yet many people do not know much about them. In this article we will learn about Fixed Deposit from basics and I will try to clear some common doubts.

What is a Fixed Deposit?

A Fixed Deposit or FD is a financial instrument through which a person (the investor):
1. gives money to a bank for a certain period;
2. receives interest;
3. gets his money back at the end of the period.

For example, Mr Aditya (age 40) decides to invest Rs 10,000 in a 1 year FD offering 8% interest. At the end of 1 year he will get back Rs 10,800. Rs 800 is the interest earned by him.

Fixed deposits are considered to be very safe investments. They are offered by national banks, private banks and companies.

Fixed deposits of nationalized banks like SBI, PNB etc. are safer than private bank fixed deposits. Private bank fixed deposits are in turn safer than corporate fixed deposits.

A Fixed Deposit is also known as a Term Deposit.

Features of a Fixed Deposit

A Fixed Deposit can be described by three parameters:
a. amount of investment;
b. rate of interest;
c. length of investment.

Mr Aditya’s Fixed Deposit investment given above can be described as:
a. Investment of Rs 10,000;
b. Rate of interest of 8%;
c. Length of Investment – 1 year.

Interest Rate

The interest rate of an FD will not change during the term. Hence it is very easy to calculate the maturity value.

Senior Citizens generally receive 0.5% extra interest rate. While Mr Adity receives 8% interest, his father may get 8.5% or more as interest rate.

If Mr Aditya takes a 5 year FD at 8%, his rate of interest will stay as 8% every year.

Interest Computation

  • Interest is calculated quarterly for fixed deposits of 6 months and above.
  • Simple interest is used to calculate interest for FD of less than 6 months.
  • Fixed deposit interest is taxable.

Length of investment

  • A person can invest in a Fixed Deposit with period between 7 days upto 10 years. However very long term Fixed Deposits are not very common.
  • 3 to 5 years fixed deposits are most common.
  • Tax saving fixed deposits have a period of 5 years.

Types of Fixed Deposit

There are broadly three types of Fixed Deposits in India reinvestment, interest payout and short term deposits.

  • Reinvestment fixed deposits are the most common type of fixed deposit especially among working people. This is a cumulative scheme in which the interest earned is not paid back, but reinvested. Hence the money grows at a compound interest.An amount of Rs 10,000 grows to Rs 10.824 at quarterly compounding at 8%. In a simple interest calculation, Rs 10,000 will grow to Rs 10,800 only.
  • Retired people prefer Income Certificates. In a Monthly Income Certificate, a person is paid interest every month, and at the end he gets back his initial money.
  • Companies generally invest in short term deposits to manage their cash-flows.

Fixed Deposit Calculator

A Fixed Deposit Calculator will help you calculate your future amount based on your planned investment and prevailing interest rates.

You can try using any one of the below calculators:
http://www.hdfcbank.com/personal/fixed-deposit-calculator

A Few Last Words

I hope you found this article useful. If you have any comments please feel free to contact me.

Before making any investment decision, please contact your financial adviser. I have provided this article for educational purpose only.

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Reference

https://en.wikipedia.org/wiki/Fixed_deposit
http://www.moneycontrol.com/fixed-income/banks-deposits/
http://www.icicibank.com/Personal-Banking/account-deposit/fixed-deposit/index.page
http://www.axisbank.com/personal/deposits/fixed-deposits/fixed-deposit-features.aspx

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

One thought on “Understand and Learn about Fixed Deposit

  • November 10, 2016 at 9:10 pm
    Permalink

    dear sir normally when people particularly myself see the safety,return,tenure/lock-in period,interest rate,maturity amount available in a ready reckoner tabular format
    they feel they had almost got it.but for each investment & savings plan/scheme you had so beautifully articulated.minimal of a paragraph or two of your elucidation
    gives us so much deeper understanding and we just relish& thank your enlightening presentation .

    Reply

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