One of the most sought after options for savings and investing is fixed deposits (FD). Fixed deposits give you a chance to receive interest on the money you deposit for a set length of time. If you want a reliable solution, you can select from various types of FD to prevent financial risks.
Banks and NBFCs cater to the needs of the customers by providing different types of fixed deposits. The process of opening a fixed deposit is very easy; you can do it online or offline, depending on your situation. FDs are ideal since you can redeem the principal and interest as soon as they reach maturity.
Given the variety of FD alternatives available, you can feel a little confused and in need of assistance selecting the ideal one. However, it might be simple to make a decision once you are aware of all the types of fixed deposit accounts that you can open and their major benefits. But before learning about the types, let us first understand what fixed deposits are!
Fixed Deposits or FDs are a type of investment where you deposit a fixed amount for a fixed tenure and earn interest on them. These types of investments are risk-free as they are directly governed by the Reserve Bank of India (RBI). Depending on the amount invested by you, the interest rate tends to change. A higher amount attracts higher rates and vice versa. Currently, all banks and Non-Banking Financial Companies (NBFCs) provide the facility for fixed deposits.
Every bank or NBFC will provide you with different types of fixed deposit accounts to invest your money securely. It is important to have a firm understanding of all the types to be able to assess the suitable FD type for your investment. Here are different types of fixed deposits that you must know of:
- Tax Saving Fixed Deposits
Tax Saving Fixed deposits, understandable by the name itself, help in saving taxes. This option is available only to Hindu Undivided Families and Resident Individuals. Tax-saving FDs are provided by most of the banks in the nation, although they only accept one-time deposits. Note that these FDs permit investors to claim an annual tax reduction of up to Rs. 1.5 lakh. Tax-saving FDs also have a 5-year lock-in period during which money cannot be withdrawn.
- Standard Fixed Deposits
Standard fixed deposits are the most frequently chosen FD option out of the various types of fixed deposits. In India, almost every bank gives an option of opening a standard fixed deposit account. An investor is required to invest their money for a set amount of time at a set interest rate. The standard fixed deposit term ranges from seven days to ten years, so you can choose any range of time to invest.
- Special Fixed Deposits
Special fixed deposits are provided by banks during the low-interest rate period. Therefore, they are available for a limited time. They are usually provided to older citizens with interest rates that are higher than normal. It gives an exceptional time span, for example, 290 days, 390 days, etc. Special FDs are a preferred option for many investors since higher interest rates are available.
- Cumulative Fixed Deposits
Cumulative FDs provide an advantage to those who want an increment in their savings or who want to build a sizable investment portfolio. These FDs benefit the depositor as the interest earnings are added to the principal amount due at maturity. The total interest earned under this form of FD is quite significant because it is compounded by adding the interest accrued over the course of the FD tenor to the principal.
- Non-Cumulative Fixed Deposits
Non-Cumulative FD is suggested to individuals who don’t want an impact on their principal and seek recurring expenses on the fund. According to the investor’s preference, the interest on these deposits can be offered on a monthly, quarterly, half-yearly, or annual basis. This sort of FD produces a periodic income throughout the tenor because the interest is not accrued but rather distributed at regular periods.
- Flexi Fixed Deposits
Flexi FD is a unique kind of fixed deposit option that combines the compounding advantages of a fixed deposit. Investors in flexi fixed deposit benefit from high FD interest rates as well as the liquidity provided by savings accounts. Additionally, flexi fixed deposits allow for partial withdrawals from the savings or current account up to a certain amount.
After learning about all the types of FD accounts to choose from, you can now think clearly about the type of investment you wish to make. A fixed deposit investment of any type is going to yield fruitful returns for you in the future. Here are all the reasons why fixed deposits should be given priority as an investment avenue:
- Yields fixed returns
Returns on fixed deposits are not affected by market fluctuations, unlike other investment instruments. This reflects the fact that FD interest rates will not fluctuate over time and will give the investors the benefit of stability. Once your investment tenure is matured, you will receive guaranteed returns with interest.
- Option to withdraw funds
A fixed deposit gives you the flexibility to withdraw your funds before maturity. This flexibility is usually granted in financial emergencies. The bank may levy some penalty on premature withdrawals but will make your funds readily available.
- Makes loan application easy
Holding a fixed deposit allows you to apply for a loan backed by your FD. The loan amount varies by bank, but this avenue offers quick access to funds without disrupting your FD. Thus, as an investor, you can also expand your financial goals and apply for a loan easily.
- Ease of investing
Fixed Deposit investment is the most preferred investment opportunity for the ease of investment it provides to the customers. Every bank provides you with a convenient process for opening an FD account. If you already have a savings account in the same bank, then you may have to fulfill even fewer documentation requirements.
- Suitable for short-term financial goals
Fixed Deposit is an optimal choice for short-term financial aspirations. A fixed deposit safeguards your principal while consistently generating interest on your invested sum. Many individuals opt for fixed deposits to fulfill short-term financial goals like buying a vehicle, saving funds for a getaway, purchasing electronic devices, and similar goals.
Fixed Deposits are one of the sought-after investment opportunities utilised by people for securing funds for the long term. The interest rates offered within fixed deposits lead to higher return due to the compounding property of the interest. There are different types of fixed deposits that you avail to leverage the benefits of FD. With all the types listed above, you can assess your preferred type by comparing them with the aforementioned factors. All in all, it highly depends on which FD opportunity works the best with your personal requirements. Once you get the clarity of it, you will also get to receive the perks of fixed deposits.