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What Is A Fixed Deposit (FD)? Definition, Full Form & Types

mahindra-finance-author

by Mahindra Finance

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February 5, 2024

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4 mins read

A fixed deposit (FD) is a type of savings account offered by NBFCs and financial institutions where you invest a lump sum of money for a fixed period of time, typically ranging from a few months to several years. In return for your commitment to keep the money locked in for the chosen period, the lender guarantees you a fixed interest rate on the invested amount. This interest rate is determined at the time you open the FD and remains constant throughout the tenure.

Ever stumbled upon the acronym "FD" anywhere, leaving you scratching your head? Worry not, for this blog dives deep into the world of Fixed Deposits (FDs), unravelling their definition, types, and potential benefits just for you.

So, what exactly is a fixed deposit?

Consider it a financial agreement with your NBFC or post office where you park your savings for a predetermined period at a guaranteed interest rate. Unlike a savings account, you commit to locking away a lump sum for a specific tenure, say 6 months, 2 years, or even 10 years. In return, the NBFC rewards you with a fixed rate of interest, providing stability and predictability to your investment journey.

Why FD and not just any "D"?

Here's the beauty of Fixed Deposits:

  • Safety First: Backed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), your principal amount is insured up to Rs. 5 lakh in case of lender failure. Talk about peace of mind!
  • Guaranteed Returns: Unlike market-linked investments that come with inherent risks, FDs offer assured interest rates throughout the tenure. So, what you see is what you get, no surprises there.
  • FDs come in different flavors to suit your needs. Choose from standard FDs, tax-saving FDs, senior citizen FDs, and even cumulative FDs. Each cater to specific goals and offer unique benefits.
  • Flexibility Matters: While FDs lock your money for a defined period, some offer premature withdrawal options with a penalty. Additionally, you can opt for monthly, quarterly, or yearly interest payouts to suit your cash flow needs.
  • Ladder Up Your Savings: Want to maximize your returns? The FD laddering strategy involves investing in FDs with different maturities. As one matures, you reinvest the principal and accrued interest in a new FD with a longer tenure, potentially securing higher rates.

Now, let's delve into the different types of FDs:

  • Standard Fixed Deposits: Your FD, offering a fixed interest rate for a chosen tenure. Perfect for parking your savings and earning guaranteed returns.
  • Tax Saving Fixed Deposits: These FDs come with a lock-in period of 5 years but offer the dual benefit of tax deduction under Section 80C and guaranteed returns. Ideal for tax-conscious investors.
  • Senior Citizen Fixed Deposits: Specially designed for senior citizens, these FDs offer higher interest rates compared to regular FDs, providing them with a secure income source.
  • Cumulative Fixed Deposits: The interest earned on these FDs gets compounded periodically, leading to a higher maturity amount compared to regular FDs. Great for long-term wealth creation.

Before you hop on the FD bandwagon, here are some things to consider:

  • Lock-in Period: Remember, your money gets locked for the chosen tenure. Premature withdrawals usually incur penalties.
  • Interest Rates: Compare rates offered by different financial institutions and post offices to find the best deal.
  • Tax Implications: Fixed deposit interest rate earned is taxable. However, tax-saving FDs offer deductions.

In conclusion, Fixed Deposits are a valuable tool for securing your savings and generating stable returns. With their varied options and guaranteed interest rates, FDs can be a perfect fit for risk-averse investors and individuals seeking to achieve specific financial goals. So, explore the world of FDs, choose the one that aligns with your needs, and watch your savings grow steadily!

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