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All About Fixed Deposits

May 9, 2022Roshel Rebello
A vintage table clock with a globe in the background.

A piggy bank evokes a sense of nostalgia. As kids, our parents would have encouraged us to save any amount, however big or small, in a piggy bank. An overflowing piggy bank meant that we could buy toys or sweets. This is one of the most effective ways parents can inculcate the value of saving money rather than spending in kids. These early lessons can go a long way in helping your kids create a secure future for themselves.

Similarly, if you wish to save and grow your money at the same time, then one of the best ways to do so is by opening a time deposit or a fixed deposit account with your bank. You can easily open a fixed deposit with a lumpsum amount for the selected tenure and the prevailing interest rate. Upon maturity, you can reap the benefits or choose to rollover the amount for your deposits to continue earning interest at the prevailing interest rate. This financial instrument helps you plan for a better future so that you can reach your financial goals with ease.

Why Should You Open a Fixed Deposit Account?

A fixed deposit is offered by a bank for a fixed term. If you have extra funds, you can choose to park those funds in a fixed deposit for a particular tenure, ranging from a few days to a few months. A fixed deposit offers a predetermined interest rate on the funds, so upon maturity, you will be eligible to get your principal along with the interest that you have earned. As the interest rate is predetermined, your principal and the interest you earn will not vary due to market fluctuations or other factors.

How Does a Bank Use a Fixed Deposit?

When a customer deposits his/her money in a fixed deposit for a particular term, the bank uses that amount to invest in other financial products that may pay a higher rate of return (RoR) or may choose to lend the money to its other clients, thereby receiving a higher rate of interest from the borrowers.

What are Foreign Currency Fixed Deposits?

Foreign currency fixed deposit accounts enable consumers to keep or convert their money to foreign currency units and then deposit this amount for a particular tenure. Depending on the tenure, the principal amount earns interest at a predetermined rate. If customers deposit an amount for longer periods, it is more likely that it can earn a higher rate of interest. Upon maturity, the principal amount and the interest earned are retained in their original currency or converted according to the prevailing foreign exchange rate and then deposited into your bank account.

Inflation and Fixed Deposits

A fixed deposit is for those who are looking for portfolio diversification and want to earn better interest than a savings account. Even though fixed deposits help keep your money safe, the interest offered on such financial products might be just above the inflation rate. As the interest on fixed deposit gets taxed, the returns on maturity may fall below the rate of inflation. So, make sure that you check the prevailing fixed deposit interest rate and check if the returns will be in sync with your financial goals.

Examples of Fixed Deposits

Fixed deposits are suitable for people who are looking for an assured return. As the fixed deposit interest rates are predetermined, the maturity amount is fixed and not subject to market fluctuations. To better understand how much money you will get when you enroll in a time deposit, below is an example.

If you deposit a principal of US$10,000 in a fixed deposit for a period of 12 months and at a rate of 0.1% p.a., then at maturity you will be able to earn an estimated maturity interest amount of US$10, subject to taxes. No interest will be paid if you withdraw your deposit prematurely.

Frequently Asked Questions

How does a fixed deposit work?

A fixed deposit allows customers to park their funds for a particular period so that they will be eligible to earn a predetermined rate of interest.

What is the benefit of a fixed deposit?

If you are looking for a more conservative portfolio diversification strategy with a fixed lock-in period, then a fixed deposit can be an ideal option for you. You can get a higher rate of interest for your money than your savings account, helping you earn more.

What are the pros and cons of fixed deposits?

Fixed deposits help you diversify your funds for a fixed term so that you will be able to earn returns at a fixed interest rate, which is usually a little higher than the interest rate that is offered on a savings account. However, the interest you earn on fixed deposits may not be able to beat inflation, as the interest earned is comparatively lower and may also be subject to a tax deduction. There may also be bank charges for premature withdrawal or closing of a fixed deposit account.

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