Fixed Deposits
Financial Services
What is Fixed Deposit?
Fixed Deposit also known as term deposit is a system of investing capital wherein a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest depending on the maturity period.
How does it work?
The system of investing in fixed deposit is one of the most common scheme open to an investor and gives a higher rate of interest than a savings bank account.
The scheme work with great flexibility it ranges from 7days to 10 years. The rate of interest is conjugated annual basis and gets added with the principal amount.
Minimum deposit amount can be from Rs 100/- and there is no upper limit also this differs from Bank to bank.
The facilities vary from bank to bank but are fairly safer because banks are subject to control of the Reserve Bank of India. In our view, the economy is undeniably headed for elevated rate of interest and it is as high as people can never expect it. For this reason, investors for their own sake ought to make certain balance in their portfolios in order to combat with the circumstances.
Features
Investing in Bank deposits is rather safe as the banks are under the control of RBI in regard to numerous policy and operational limitations.
The banks can offer various rate of interests in fixed deposits of different maturities though the interest is compounded once in three months, which lead.
The lowest amount for deposit varies from bank to bank. IN few bank, it is as low as Rs.100/-
If the amount is kept in five or ten small fixed deposits instead of making one big deposit then the investor while withdrawal of partial amount would require to encash one or two deposit according to need. The loss persistent in interest will be less in such case.
Advantages
These deposits are the safest investment scheme as bank deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of India.
It is also possible for the investor to get loans up to75- 90% of the deposit amount from banks against his or her fixed deposit receipts.
Interest rate earned from the deposit will be counted as 2% lesser than the charged interest rate.
With addition of other stipulated income, bank deposit investment is subjected for exemption from income-tax under 80L section , and limit for this is up to Rs.12,000/- . It has become effective from A.Y. 1998 to 1999.
Also, from A.Y. 1993-94, bank deposits are completely excused from wealth tax. The 1995 Finance Bill Proposals initiated tax deduction at source (TDS) on fixed deposits on interest incomes of Rs.5000/- and above per annum.
Returns
The rate of interest for Bank Fixed Deposits differs between 4 and 11 per cent, depending on the maturity period of the FD and the amount been invested and also differ between each bank.
Although a Bank FD does not offer a regular interest income thy gives a lump-sum amount on its maturity.
Some banks have facility of providing interest every quarter or every month, but in such case it may be at a discounted rate in case of monthly interest.
The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 10 years.
Case Study
Given are the rate of interest which were offered to investors in 1970s - 1990s
As per Business World Article 2004 with the below mentioned statistics
- First half of 1970: rates of deposit for the period of maturity from 3 to 5-year was stable at 6.5-7%
- At the Middle period of 1970: rates of deposit went up to 9%
- During the period of 1980s: rates of deposit poised at the limit of 10%
- From 1991 to1992: rates of deposit earned 13%
- From 1992 to 1993: According to Maturity, prescriptions were substituted by 13% of single ceiling rate on all deposits above 46 days, according to the RBI publication.
Things to remember while opening Fixed Deposits
- Check out the rate of interest and the inflation rate before opening an FD as a high inflation rate can plainly chip away your real returns.
- Before opening a FD account, try to check the rates of interest for different banks for different periods and find out the best slot that suits your requirement.
- Once you deposit the amount Check deposit receipts vigilantly to see if all details have been correctly filled in.
- Investors shouldn't lock-in their investments for longer time periods as it might avert them from getting benefit from other hike in deposit rates.
- Variable rate deposits facilitate investors to take advantage of on a future hike in interest rates as this rate is retune in line with a standard rate.
How to open an FD Accounts?
Opening an FD account is very simple.
- The investor can open a Bank FD accounts at any bank, be it nationalized, private, or foreign.
- One just needs to open a FD accounts with the bank and make the deposit and would receive a deposit receipt or a maturity period issued which is updated from time to time.
