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What is Fixed Deposit

A fixed deposit or FD is an investment product offered by banks and Non-Banking Finance Companies (NBFCs). In FDs, you invest for a set amount of time and get a fixed interest rate.

You know at the time of investing what interest rate you will get and how much money you will receive at the time of maturity. You also get an option of selecting regular payout of interest.

Advantages of FD

  • Assured returns – Unlike most other investment schemes, FDs offer guaranteed returns on the deposited sum.
  • Offers great flexibility – The best FD plans offer flexibility when it comes to the tenure of the plan. Depending on investor goals, they can either open short-term FD accounts or long-term FD accounts. For reference, most financial institutions offer maturity tenures ranging from 7 days to 10 years.
  • High capital appreciation – Cumulative fixed deposit plans compound interest monthly or quarterly or half-yearly. Hence, the deposit amount is substantially appreciated by the end of tenure.
  • An additional source of income – The investor can select the frequency of interest payout for non-cumulative fixed deposit plans. Therefore, they can act as an added source of income.

Types of FDs

There are several fixed deposit types that investors need to know about before investing. Without such knowledge, you may end up picking up plans not suitable to your investment objectives. Listed below are some of the common options open to prospective investors.

  • Corporate fixed deposits

    These are fixed deposit schemes that are held by companies, other than banks. Also known as company FDs, investing in such instruments, may, in some cases, lead to higher returns.

  • Standard fixed deposits

    Standard plans are basic investment schemes where you invest a fixed amount with a financial institution. After the fixed maturity period expires, you are eligible to receive the principal amount, along with the interest earnings from the scheme.

  • Senior citizen fixed deposit

    Individuals aged over 60 years are also eligible to invest in fixed deposit instruments. However, most plans geared to this age group offer flexible tenure options. Additionally, senior citizen investors are eligible for higher interest rates on their investments compared to the standard schemes.

  • Tax-saving fixed deposit

    If the primary goal of an investment is to save taxes, investors can take advantage of tax-saving FDs. However, the maximum deposit for such plans is limited to Rs. 1.5 Lakh per year. The lock-in period for this type of FD is 5 years.

  • Cumulative fixed deposit

    In these fixed deposit schemes, the interest is compounded quarterly, half-yearly, or yearly. However, the total interest earnings are paid at the time of maturity. Opting for this kind of FD allows you to build your corpus considerably.

  • Non-cumulative fixed deposit

    Interest earnings on fixed deposits are paid out monthly, quarterly, or half-yearly. This option is best for investors looking for a regular source of income. Hence, pensioners benefit prominently from such plans.

  • Flexi fixed deposit plans

    In this case, the deposit moves between a savings account and an FD account. Therefore, to initiate an investment using Flexi FDs, investors need to connect the fixed deposit account with their savings account. Investors can enjoy high-interest rates on their deposits along with liquidity with this category of FD plans.

  • NRO fixed deposit account

    Non-resident Indians can deposit their earnings generated from India in an NRO FD account. The interest earned from these FD accounts can be repatriated entirely by NRO account holders, and the principal amount can only be repatriated up to a certain limit.

  • NRE fixed deposit account

    NRIs can remit their income generated abroad and invest in an NRE fixed deposit account. Both the interest and principal are repatriable in this case.