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Know the Fixed Deposits (FDs): Types, Suitability and Advantages


Fixed deposits are arguably the most popular investment option among Indians. It should be a part of your investment portfolio, regardless of whether you are a beginner or a seasoned investor. This is because of the many advantages that come with a FD account:

Fixed deposits add stability to your portfolio as they are among the safest investment options available. You should use them to balance your riskier investments and lower the overall risk exposure of your portfolio.

Fixed deposit accounts earn an assured return and there is no risk of losing the principal amount. This allows you to plan ahead and build a corpus for a large expense as required.

FD rates on deposits already made are not linked to the performance of the market, and you do not have to worry about the many fluctuations.

You can opt for a periodic interest payout to manage your regular expenses, as required.

No TDS is deducted on the interest earned on your fixed deposit account up to ₹10,000 per year.

Most fixed deposit accounts offer a loan against fixed deposits as well. This loan can be up to 75% of the total principal deposited in your fixed deposit accounts. As the deposit acts as a collateral for these loans, the interest charged can be very attractive as well.

Fixed deposits are considered near-liquid as you can make a premature withdrawal from your fixed deposit account at a nominal fee deducted as a penalty on the fixed deposit rate earned.

FD rates are higher for senior citizens compared to other depositors for the same tenure.

Types of Fixed Deposit


Broadly, fixed deposits account can be classified into three types:

1. Cumulative Deposit: The interest earned on these types of fixed deposit accounts is credited to the fixed deposit annually. It is paid out on maturity along with the principal. As the interest gets compounded, your savings can grow rapidly over the years. This is a great option for anyone planning to build a corpus towards a large expense like education or wedding.

2. Non-cumulative Deposit: The interest earned on these types of fixed deposit accounts is paid out to the depositor at an agreed-upon frequency. The frequency of the payment can be set as monthly, quarterly, half-yearly or annual. The regular interest payments supplement your regular income can be used to meet your daily expenses as required.

3. Tax Saving FD: This is a special type of cumulative fixed deposit which has a lock-in period of five years. It can be used to save tax under section 80C of the Income Tax Act. No partial or premature withdrawal is allowed under this scheme. This is a great option if you have no utilized the limit available under Section 80C. Among all the options available under 80C, tax-saving FDs have the lowest lock-in periods. Remember that tax-saving FDs are illiquid and you should opt to invest in these only if you are okay with the money being locked up for five years.

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