All you need to know about Fixed Deposits

This article examines the benefits of opening a fixed deposit account and how it helps to accumulate wealth.

Fixed deposits have long been the mainstay of most conservative investors in India. If you have a surplus fund of money at your disposal, your first instinct is to create a fixed deposit account. This is a good idea, because –

* It shows guaranteed growth. Few investment options today show the promise of guaranteed returns, but fixed deposits do. In fact, fixed and recurring deposits follow a predetermined growth trajectory, based on the principal invested sum, interest payable on it, and the tenure. By the end of the deposit tenure, you are aware of how much the investment will have grown. This is not possible with any market-linked investment options. Even before you start the account, you can use a fixed deposit calculator to find out the estimated growth of the deposit on maturity.

* Its earning potential does not waver as per market forces. The biggest benefit of opening a fixed deposit account is that it earns interest at a constant rate throughout its term, irrespective of fluctuations in market rates. For example, if you started the deposit at 6% interest, you will earn 6% interest on it till maturity even if rates drop elsewhere. Do use a fixed deposit interest calculator to find out the interest earning potential of the FD on maturity, so that you invest accordingly. The fixed deposit interest calculator will help you invest the right amount of money to meet your goals.

* You can time the deposit to coincide with a major milestone. The fixed deposit gives you the freedom to choose the tenure. However, the interest rate is pre-decided by the bank on the basis of the deposit tenure. The interest is less on deposits created for less than one year. Using the information about the fixed deposit as provided by the bank, you can choose a tenure that helps you get the matured sum of money at a time when you may need it the most. For instance, you might have a future milestone like paying your child’s foreign university fees, or foreclosing your home loan. You can use a fixed deposit calculator and time the tenure to coincide with a future milestone.

* Its interest earning is vulnerable to taxation, but…However, you must also know that though the bank pays a certain rate of constant interest on the fixed deposit, interest earning exceeding Rs 10,000 is liable for taxation. It is considered as ‘income’ under prevalent income tax laws in India. But you can surmount this obstacle by investing in a five-year tax saving FD. As the name suggests, you are not taxed on the interest earning but you must stay invested for a minimum of five years.

All you need to know about Fixed Deposits

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