How Fixed Deposits in Bank works ~ ecoiq4u

Summary

In this article, we will discuss what are the types of Fix Deposit (FD) there pros and cons .who should go for FDs, and what could be the alternative of FD? What is the reason most of us rely so much on FD when it comes to investment?

Fix deposit

We consider FD as one of the safest and reliable investment instruments in India. when it comes to investment FD is our preferred choice, but things are changing. As financial literacy and awareness among us increase due to multiple sources of knowledge we are looking for other options. Now the security of our money is not the only criteria, returns also matter.

Since its inception, the returns on FD are volatile and indicates a downward trend in the future. During 1995 -1996 the interest earned on FD was 13%, in 2003-04 it was 5.27% and in this year the interest rate is 5.8%.

Features of FD

In FD we keep our money for a fixed period of time in banks and expect it to grow over a period of time. The fact that FD provided guarantee returns and its easy understanding set it apart from other forms of investment. FD works on the policy of invest and forget. The time for which we invest our money is called the maturity period. You can’t claim the money before the maturity period. In some cases, banks allow their customer to with drow the money before the maturity period.

Types of FD

Cumulative FD

In this type the interest earned on your invested money reinvested and you will get the entire amount after maturity. In this type, you will get the benefit of compounding as the interest earned is again invested and you will also get interested in that amount.

Non-cumulative FD

It is the exact opposite of Cumulative. In this type the interest earned every year is distributed to the customer. After the maturity period, you will get your initial amount back.

Sweep-in FD

It is the most attractive form of FD. In this type, if your account balance exceeds a certain limit you will get the returns of FD on that extra money.

Let’s say you have 10 lakh rupees in your savings bank account and the bank set a limit of 7 lakh, beyond that amount you will automatically get the benefit of FD. In this case, you will get the returns of FD on 3lakh and for the rest of the money you will get the normal returns.

Tax Savings FD

In this type, you will get tax benefits up to 1.5 lakhs under section 80c. The returns of this type are relatively low.

Benefits of FD

FD is good for people having a low risk-taking appetite and want a guaranteed return.

It’s good if you want to park your extra money and do not need it.

Good for senior citizens, for them, the returns are higher.

If you don’t want to involve in tracking the performance of your investment and just want to invest and forget it’s a good option.

Banks are providing loan against FD, you can use your FD as collateral if you want the take a loan from the same bank in which you have FD.

Limitation of FD

The interest earned on FD is gradually decreasing every year and in upcoming years it might not fulfill your future financial goals.

Contrary to the popular belives, the money kept in your bank account is not fully secured, there is a risk involved in it. If the bank becomes bankrupt you will not get your entire money, forget about the interest.

Most are the time we invest in FDs because our friends and the family told us to do so .we should analyze other options before investing.

The main aim of the investment is to beat inflation. With decreasing interest rates, FD is struggling to beat inflation.

The flexibility of FD is very less you can’t redeem your money before the maturity period. You have to invest a large amount in one go, there is no facility of SIPs.

Alternatives of Fd

In search of good returns, people are looking for other options such as mutual funds, gold, real estate, and equities. There is no doubt that this option gives you good returns but there is always a risk factor involved in this type of investment. We can cut the risk and get a good return by becoming aware of our investment. For instance, if you are investing in mutual funds there should be clarity about your risk-taking ability, your financial goals, the sector in which the mutual fund is investing your money.

The perspective of people towards investment is changing. We are exploring new opportunities so that we could achieve our most ambitious goal in the future. While investing we shouldn’t put all our eggs in one basket. We should not completely rely on one particular investment instrument .our investment should be diversified and the allocation of funds may vary with respect to age, income, risk-taking ability, and your financial goals.