The fixed deposits (FDs) are nowadays one of the most popular investment options among the novices of India. The security, predictability, and ease with which it is invested in makes FDs a natural choice to a person new to financial investing. As opposed to other more volatile securities such as stock markets or mutual funds, fixed deposits offer a safe environment through which to accumulate savings with minimum exposure to risks. Further, certain schemes like fixed deposit to the older generation make it more affordable and inclusive by providing a better interest rate to the older generation.
What Is a Fixed Deposit?
fixed deposit is a bank and non-banking financial institution product that allows people to deposit a sum of money, high in terms of lump sum, at a certain period of time. The deposited amount will attract interest; this will be re-deposited in the account of the investor either periodically or on maturity depending on the plan adopted. Funds invested in FD are tenure locked unlike other savings options hence leading to disciplined savings.
These are the main characteristics of fixed deposits.
- Assured Returns: The assured returns are one of the most attractive features of the fixed deposits. The rate charged on the amount invested is fixed over the period of investment thereby protecting the investors against the fluctuating market.
- Flexibility in Tenure: Fixed deposit tenure may be as low as 7 days and up to 10 years whereby the investor has the flexibility to make tenure investments in accordance with his/her financial objectives.
- Low-Risk: FDs are said to be safer than equity investments or mutual funds. There are numerous traditional fixed deposit programs insured up to 500,000 in the Deposit Insurance and credit guarantee corporation (DICGC) in India.
- Liquidity: Although FDs have an advantage of locking money towards disciplined savings, it also has a clause of the ability to withdraw the deposit prior to maturity. However, premature withdrawals are normally subjected to a penalty.
Young investors prefer fixed deposits because of the following reasons.
Diversity and ease.
It is also easy to do the fixed deposits, which is why it is appealing to newcomers to the financial investments world. Novices are able to open and operate an FD account without having to be particularly versed with financial instruments or spending much paperwork.
Examples: Take the case of a novice with a 1 year FD with a rate of interest of 6.5 per annum. Simple interest formula can be used in order to compute the returns:
Interest = Principal x Rate of Interest x Time (in years)
Substituting the values:
Interest = ₹1,00,000 × 6.5% × 1 = ₹1,00,000 × 0.065 = ₹6,500
The whole amount to be received will be 1,00, 000 (Principal) + 6,500 (Interest) = 1,06,500 at maturity.
Predictability of Returns
Novice investors tend to demand investments with less uncertainty. FDs are predictable and stable returns as opposed to the equity investments where market trends dictate profitability. It is more predictable, thus financial planning is more effective.
Example: We will consider a person who has 5,00,000 and he wants to save it at a compound interest rate of 7 per year over a period of 5 years. The amount of maturity can be calculated with the help of the formula of the compound interest:
Maturity Amount = P × (1 + r/100)^n
Where:
 P = Principal amount = ₹5,00,000
 r = Rate of interest per annum = 7%
 n = Number of years = 5
Substituting the values:
Maturity Amount = ₹5,00,000 × (1.07)^5 = ₹5,00,000 × 1.40255 ≈ ₹7,01,275
In this way, the investor will earn around 701275 at the expiry of 5 years.
Access to Fixed Deposit Programs by the Senior Citizens.
An additional benefit of Fixed deposit for senior citizen is high interest rates. Banks offer fixed deposits at higher returns to satisfy the financial needs of the aged and this may be in the form of an increment of up to 0.25 to 0.75 percent on top of the usual FD rates.
Example: When a senior citizen transacts 3,00,000 on a regular deposit rate of 6.75% per annum, he/she enjoys a better rate of, say, 7.5%. The difference in the earned interest can be computed by:
Interest on regular FDs (Compound):
₹3,00,000 × (1.0675)^3 ≈ ₹3,65,624
Interest on FD with Senior Citizen Benefit:
₹3,00,000 × (1.075)^3 ≈ ₹3,77,253
The interest rate is added to the senior citizen by 11,629.
Security and Trust
One of the most common and the most reliable saving structures in India is the fixed deposits. The regulatory guidelines that are followed by banks and other financial institutions also give confidence to the depositors and hence FDs are favored by first-time investors.
Tax Benefits
There are also fixed deposits like the tax saving FDs which enable investors to receive deductions of up to 1,50,000 under Section 80C of the Income Tax Act. Nonetheless, it is important to mention that the interest that one gains on FDs would be taxable.
Special Senior Citizens Fixed Deposit -Added Benefits.
Senior citizen fixed deposits are unique in the way that they offer senior citizen investors with exceptional benefits. Besides, the increase in interest rates, some schemes offer more flexibility of tenure, monthly payouts of better cash flow and special insurance benefits associated with deposits. These characteristics will cover the financial needs of the retired generation and fixed deposits will be a perfect tool in saving the money.
Before investing in fixed deposits, it is important to consider the following.
Although fixed deposits have plenty of advantages, it is essential that the investor should know and analyze some points:
- Inflation: When the inflation is high then the returns on the fixed deposits might not necessarily be higher than the inflation rate.
- Interest Taxability: The interest obtained on the fixed deposits is subject to taxation in the income of an individual. After the taxation, the positive yield becomes less effective.
- Punishment on Early withdrawals: Early withdrawal of FD can be punishable and this can be characterized by low returns.
- Comparison of FD Rates: Before settling on an appropriate FD scheme, investors would be advised to compare interest rates of various banks and financial institutions.
Summary:Â
The beginners are fond of fixed deposit (FDs) due to their simplicity, safety, and predictability of returns. FDs have flexible tenures and guaranteed income, which ensures that investments are not affected by changes in the market but allows first-time investors to be able to organize their finances. An example is an investment of 1, 00,000 at a rate of 6.5 percent gives an interest of 6, 500 per year. Also, senior citizens are offered fixed deposit plans with better interest rates, which increases the accessibility of the scheme by retired persons.
Predictability of returns, the presence of tax-saving FDs, and security make the FDs an attractive choice of investment. It is however important that investors consider inflation adjustments, tax considerations, penalties and interest rates between banks.
Disclaimer
This paper is a generalized description of fixed deposits according to the prevailing financial standards in India but not as a financial advice. Before committing to investments, investors need to evaluate all advantages and disadvantages, evaluate the situation in the market and use the services of professionals in case it is necessary.
