What is a FD? Learn About Fixed Deposits, their Interest Rates, Deposit & Benefits

A Fixed Deposit (FD) is one of the most popular investment options in India. It is a low-risk investment option that offers a fixed rate of return. With FDs, you can invest your money and earn a fixed rate of interest for a fixed period. These are offered by banks and other financial institutions for varying tenures. 

In this blog, we will discuss what FDs are, their benefits, types, and factors to consider before investing in them. Whether you are a new investor or a seasoned one, this comprehensive guide will help you make informed decisions when it comes to investing in fixed deposits. Let us now learn what is fixed deposit with examples, types, benefits and challenges of investing in them.

What is an FD (Fixed Deposit)? 

A fixed deposit is a financial instrument where an investor deposits a lump sum amount of money for a fixed period of time with a financial institution like a bank or a non-banking financial company (NBFC). 

The deposited money earns a fixed interest rate that is higher than a regular savings account. The fixed deposit interest rate remains the same throughout the term of the deposit. At maturity, the investor gets back the principal amount along with the interest earned. Let us now explore how a fixed deposit account works. 

How Does Fixed Deposit Work?

When opening an FD Account, individuals must deposit a specific amount for a set period after they open fixed deposit accounts with withdrawal restricted until maturity. Investment periods range from 7 days to 10 years, depending on preference.

FD interest rates hinge on the investment period and deposit amount. Longer periods yield higher interest rates, resulting in increased earnings. Interest earned is credited to the investor’s Savings Account or reinvested in the FD at the end of the tenure. Most banks mandate deposit holders to maintain a Savings Account.

How to Open an FD Account? 

Learn how to open a Fixed Deposit (FD) account effortlessly, whether online or offline.

Online Process:

1. Go to the official website of your chosen bank or NBFC.
2. Create a new account or log in if you already have one.
3. Select the FD account option.
4. Fill in essential details like principal amount, nominee, and tenure.
5. Confirm your details and make the payment.
6. Download the receipt for future reference.

Offline Process:

For existing account holders: 

1. Complete the FD application form and submit it at your branch.
2. For new account holders: Submit the FD application form along with identity proof, address proof, and other necessary documents for KYC completion.
3. Open an FD account seamlessly, enjoying benefits like easy payment, closure, and renewal. 

The process may vary slightly between institutions, so be sure to check with your specific bank for any unique steps.

How can NRIs Invest in Fixed Deposits?

NRIs have the option to open fixed deposits in India, with two main types: NRE and NRO fixed deposits. These accounts offer various benefits, and the interest rates match those available to residents. Notably, interest earned on NRE fixed deposits in India is tax-free.

Due to attractive NRI FD interest rates, many NRIs prefer opening FDs in India. The process is straightforward and can be done through different channels:

Online Application

• Directly apply for an NRI FD on the website by clicking the ‘Apply Now’ link and selecting the desired FD type from the dropdown menu.
• Fill in basic details on the form, submit it, and expect a call from a bank executive.
• The executive will assist with necessary paperwork and facilitate the account opening at your doorstep.

Request a Call Back

• Contact the customer care number or request a call back online.
• A representative will guide you through the account opening process, and documents will be collected at your doorstep.

Offline Application

• Download relevant forms from the product page and fill them out.
• Submit the forms at the nearest bank branch, where the account opening process will be initiated.
• For NRIs outside India, document submission can be done at partner branches or local bank mailboxes.

Internet Banking

• If you already have an NRE account, log in to the NetBanking website or MobileBanking App.
• Apply for an NRI FD online through the existing account.

These streamlined methods ensure that NRIs can easily and efficiently open fixed deposit accounts in India, taking advantage of competitive interest rates and associated benefits.

Types of FDs (Fixed Deposits)

There are various types of Fixed Deposits in India, including the following different types of fixed deposits: 

• Cumulative Fixed Deposits: In this type, the interest is compounded and paid along with the principal amount at the end of the investment tenure.

• Non-cumulative Fixed Deposits: In this type, the interest is paid at regular intervals – monthly, quarterly, half-yearly or yearly – as chosen by the investor. The principal amount is paid at the end of the investment tenure.

• Flexi Fixed Deposits: This type of fixed deposit allows investors to withdraw a part of the deposit amount before maturity without incurring a penalty. The interest is paid at regular intervals, and the remaining amount continues to earn interest till maturity.

• Tax-saving Fixed Deposits: These are special fixed deposits offered by banks that come with a lock-in period of five years and offer tax benefits under Section 80C of the Income Tax Act. The interest earned on these deposits is also taxable.

• Sweep-in fixed deposits: These fixed deposits allow you to link your savings account and fixed deposit account, allowing you to earn higher interest rates while maintaining liquidity.

• Senior Citizen fixed deposits: These are similar to regular fixed deposits, but the senior citizen FD rates are usually higher for senior citizens.

Calculation of interest on Fixed Deposit

The calculation of interest on FDs depends on three factors: 

1. Amount invested 
2. Rate of interest 
3. Duration of the fixed deposit

The formula for calculating interest on an FD = Amount Invested x Interest Rate x (Duration/ 12 months)

Fixed Deposit Example

Let’s understand how interest is calculated on an FD with the help of an example of fixed deposit investment. 
Suppose John is investing ₹30,000 in a cumulative FD for three years at an interest rate of 6% per annum. When the tenure ends, the FD will have a maturity value of ₹35,730.

Year	Principal Amount	Interest  Earned (at 6% p.a.)	Maturity Value
1	₹30,000	₹1800	₹31,800
2	₹31,800	₹1908	₹33,708
3	₹33,708	₹2022	₹35,730

Eligibility for Fixed Deposits (FDs)

You can easily invest in an FD if you are: 

• Indian residents
• NRI
• Minors
• Senior Citizens
• Partnership Firms
• Companies
• Societies and Clubs
• Sole proprietorship
• Individuals or Joint Investors

What are the Documents Required to Invest in an FD?

To invest in an FD, the following documents are generally required:

• Identity proof (such as an Aadhaar card, PAN card, passport, or driving license)
• Address proof (such as an Aadhaar card, passport, utility bill, or bank statement)
• Passport-size photographs
• In the case of senior citizens, age proof may be required
• In the case of a joint account, the documents of all account holders are required
• It’s important to check with the specific bank or financial institution regarding their specific requirements.

Benefits of Investing in an FD (Fixed Deposit)

Here are a few benefits of fixed deposit investments:

1) Guaranteed Returns: The best thing about investing in an FD is that you know the amount that you are going to receive after the completion of your tenure as your FD receipt.  

2) Better Interest Rates: Another factor you should consider is that FD interest rates are higher than normal savings accounts. In fact, FDs provide special interest rates for senior citizens. 

3) Hassle-free Investment: It is quite easy to invest in an FD. All you need to do is visit your bank, fill out an application form, and submit it. That’s it! However, some banks offer online services as well. Hence, you won’t need to visit a bank to invest in an FD. 

4) Easy to Monitor: Since the FD interest rates do not fluctuate, you do not need to monitor their performance continuously. 

Apart from this, Investment in FDs allow you to withdraw your money whenever you want. However, you will be charged a penalty for doing so. 

We hope that now you are aware of an FD’s benefits. But as we know, everything has two sides, i.e., the benefits and the disadvantages. So, without further ado, let’s check out the disadvantages of fixed deposits.

Disadvantages of Investing Fixed Deposits

1) Reducing Interest Rates: Fixed deposit rates are better than a typical savings account, but these interest rates are not in line with inflation. 

Many people show disinterest in FDs because, even after investing in a long-term FD, they don’t earn as much as they should.

2) Locked-in Funds: If you are putting money into an FD, you should get the lump sum amount only after the completion of your tenure. Consequently, you can not easily convert your FD into cash.

3) No Tax Benefit: The interest earned on an FD is added to the holder’s taxable income. This means that there will be deductions on any interest earned by you. 

4) Penalty: If you prematurely withdraw the fixed deposits, you will have to pay the penalty.
5) Fixed Interest Rate: The interest rate on the FD will remain the same till the completion of the tenure. So, even if the Fixed Deposit rates have increased, the bank will not pay any additional interest to you.

How to Invest in FDs? 

You can invest in an FD by following these simple steps: 

1) Check and compare interest rates 

Different financial institutions offer different interest rates on FDs. Hence, carefully check and compare the interest rates offered by these financial institutions before making any investment decision. 

2) Pick suitable deposit tenure

FDs typically have a term of between seven days to ten years. Therefore, you should choose a reasonable deposit tenure on the basis of your needs. 

Moreover, financial experts frequently advise laddering FD across various tenures to spread out interest rate-related risks and improve liquidity.

3) Choose interest payout frequency 

Once you finalize the tenure, you may choose the frequency at which you want to receive interest payouts. Usually, you have the following options to receive interest payouts: 

• Monthly 
• Quarterly 
• Semi-annually 
• Annually.

If you don’t want to receive interest immediately, you can also choose the reinvestment of interest FD mode. This facility will enable you to reinvest your earnings once they have been compounded quarterly and will be paid out with the principal invested when it matures.

4) Choose a mode of deposit 

Once you decide on the interest payout frequency, you can move on to the next step, i.e., choosing a mode of deposit. 

Most financial institutions allow FD holders to deposit funds either online through Internet banking or in person by visiting the nearest branch. Once you decide on your mode of deposit, you can move on to submit an FD application and then make an investment in a plan.

What is the Impact of Investing in a Fixed Deposit on a Financial Portfolio?

Investing in fixed deposits (FDs) can have a significant impact on a financial portfolio. While FDs offer stability, they also offer relatively low returns compared to other investment options such as equities or mutual funds. Thus, investing a large portion of the portfolio in FDs may result in lower overall returns. 

Additionally, FDs have a fixed tenure and withdrawing funds before maturity may result in penalties. Therefore, it is important to consider the impact of investing in FDs on the overall financial portfolio and diversify investments across various asset classes for optimal returns and risk management.

What Does Loan Against Fixed Deposits Mean?

Pledging your fixed deposit (FD) as collateral enables you to secure a loan, with the bank providing funds in return. Failure to repay prompts the bank to retrieve the loan amount from the FD. Interest on the loan is minimal, typically ranging from 75% to 95% of the FD value, varying among banks.

This loan is accessible to all FD holders, excluding minors. Notably, it features lower interest rates, no prepayment penalties, and minimal processing charges.

How to Diversify Your Portfolio While Investing in Fixed Deposits?

Diversifying your investment portfolio is essential to reduce risk and increase potential returns. Merely investing in FDs won’t help you do that. Hence, if you want to diversify your portfolio, one way to do it is by investing in smallcases. 

smallcase is a basket of stocks or ETFs that reflect a specific market theme or strategy. By investing in smallcases, you can gain exposure to different sectors, industries, and investment strategies without having to invest in individual stocks.

Here are the steps that you need to follow to invest in smallcases: 

• Create an account on smallcase
• Choose a portfolio according to your investment goals 
• Add funds to your smallcase account 
• Invest in the portfolio 
• Track your investments

That’s all you need to build a diversified portfolio!

How Can FDs Impact Your Portfolio?

Here are a few way FDs can impact your investment portfolio:

• Maintains a Balanced Portfolio: Maintaining a balanced portfolio is essential for financial stability. Unlike market-linked options such as equities and mutual funds, which carry risks, fixed deposits (FDs) offer a secure investment with guaranteed returns over a fixed period.
• Preserving Portfolio Value: In market downturns, FD returns play a crucial role in keeping your portfolio positive. The interest gained from FDs can offset losses incurred by your market-linked investments, ensuring a stable net portfolio value.
• Short-Term Goal Suitability: While equities are ideal for long-term goals, FDs are a prudent choice for short-term financial objectives. They also prove advantageous for goals where preserving the initial capital is imperative.

Who Should Invest in Fixed Deposits?

Investing in a fixed deposit offers a predetermined duration and interest amount, with the institution guaranteeing the return of your money upon maturity. This makes FDs a secure investment, suitable for individuals with a low-risk tolerance seeking higher returns than a savings account. They are particularly useful for meeting short-term goals due to assured returns and low volatility. 

Additionally, even for those with a medium-to-high risk appetite, allocating a portion of funds to fixed deposits helps balance overall portfolio risk, especially when market-linked instruments like equity or mutual funds are involved. This stability makes fixed deposits a favorable choice for retired individuals aiming to ensure the stability of their investments.

Key Features of Fixed Deposits

In the preceding section, we explored various types of fixed deposits. Now, let’s delve into essential features for a clear grasp of what a fixed deposit entails and whether it aligns with your needs:

• Single Deposit: You can deposit funds only once; for additional deposits, initiate a new Fixed Deposit.
• Competitive Interest: Offers a higher interest rate compared to savings accounts.
• Flexible Duration: Ranging from 7 days to 10 years, providing diverse investment durations.
• Easy Renewal: Hassle-free renewal options for existing fixed deposits.
• Maturity Restrictions: Withdrawals are restricted until the maturity period. Emergency withdrawals incur penalties for the account holder.

Factors to Consider Before Investing in an FD (Fixed Deposit)

Before investing in fixed deposits (FDs), there are several factors to consider, including:

• Inflation: Inflation is the rate at which the cost of living increases. If the inflation rate is higher than the FD rates, the real rate of return will be negative, meaning the value of your investment will decrease in real terms.

• Tax rates: The interest earned on FDs is taxable as per the income tax slab of the investor. Therefore, investors should consider the tax rates while investing in FDs.

• Interest rates: The FD interest rates vary depending on the duration of the investment. Longer investment tenures tend to offer higher interest rates. Therefore, investors should consider the interest rates before investing in FDs.

• Investment tenure: FDs come with a fixed tenure, and withdrawing the investment before maturity may result in a penalty. Therefore, investors should consider the investment tenure before investing in FDs.

• Investment amount: FDs have a minimum investment amount, and investors should consider their financial goals and investment amount before investing in FDs.

Taxation on FDs

In India, tax on FD interest is based on the investor’s tax bracket and investment tenure. Interest earned on FDs is added to the investor’s total income and taxed accordingly. 

For FDs with a tenure of fewer than five years, the tax deduction at source (TDS) is applicable if the interest income exceeds Rs. 40,000 in a financial year. For senior citizens, the TDS limit is Rs. 50,000.

Therefore, before investing in FDs, make sure that you consider the taxation aspect and choose a tenure that aligns with your tax-saving goals.

To Wrap It Up…

In conclusion, fixed deposits are a popular investment option for those seeking low-risk returns. While they offer stable returns, it is important to consider factors such as inflation, tax rates, and interest rates before investing. 
Looking for higher returns than an FD? Investing in stock markets tends to produce higher returns as compared to a fixed deposit, however, it also comes at a higher risk. You can consider investing in stock markets through diversified, readymade stock or ETF portfolios curated by SEBI-registered experts on smallcase. Try now!

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