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What Is Fixed Deposit?

As the name suggests, a fixed deposit is an account where one can deposit money for a fixed tenure and earn a pre-determined return. It is one of the oldest forms of savings, preferred over a savings bank account due to a higher rate of interest.

The rate of interest your deposit earns is based on the tenure and sometimes the amount you wish to deposit. There isn't a direct correlation between the tenure and the rate of return - i.e. a higher tenure does not guarantee a higher rate of return

How to Open a Fixed Deposit?

A fixed deposit account can be opened in your own bank (where you have a savings account). All public sector banks and some private banks also accept fixed deposits.

Benefits of Fixed Deposit

  • It is a completely safe investment avenue
  • Minimal paperwork is required to open a Fixed Deposit account - most banks allow online placements of FDs
  • The income is guaranteed because the interest rate is pre-determined
  • You have the option to withdraw the deposits before maturity (at a loss of interest, but your principal remains intact)
  • Flexibility to deposit for different tenures, ranging from 7 days to 1 year and more
  • Senior citizens often avail a higher rate of return and they can opt for quarterly payouts directly into their account - this can work as a pension amount for them

Drawbacks

  • The interest income is taxable (for most individuals)
  • When interest rates are lower than the inflation, the real rate of return could be negative
  • There is a penalty (on the interest) for premature withdrawal
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