If you are planning to save money and have some funds at your disposal. For sure, Fixed Deposit (FD) is a great option. FD not only keeps your money safe but also gives far better interest on your deposit amount. If you don't have any idea about it and want to know "What is Fixed Deposit?" and learn everything about them like calculation, compounding etc, then stick with us. After reading this blog you will not have to look anywhere to get the hang of this term
We’ll explain it simply, step-by-step!
Think of it Like a "Money Locker"
Imagine you're placing your money in a secure vault at the bank. You choose to leave it there for a set amount of time—whether it's one year, three years, or even five. While the bank holds onto your money, they offer you a reward in the form of interest. This interest is like a bonus added to your account once the agreed period comes to an end.
By putting your money into a Fixed Deposit, you're essentially agreeing not to touch it for the duration of the lock-in period. In return, the bank adds interest, helping your savings grow over time.
In FDs you get more interest than your normal account. For ex:- banks give 2-4% on your normal savings account whereas in FDs they give 7-9%. So if you have some money at your disposal and also know that you are not going to use this money any sooner, it is better to put it in Fixed deposit and earn extra money.
Why FDs give more interest
Banks earn by taking your money as deposit and lending your money to someone who needs it. They charge some interest from them and gives you lesser interest thus they take their commision and earn money. For ex:- you deposit $ 1,00,000 in bank and bank assures you to give 2% interest rate and they lend this money to some one on 3% interest rate and thus they earn the difference 1%.
See, In savings account(your normal bank account) banks do not have any certainty for the amount of period they can use your money. So they can not lend this money to someone else for a long period of time. So if money is not being lent for long period of time, Banks do not charge high interest rates from the debtor(who takes loan from banks). So if banks are not earning from your income, Banks do not give you high interest on your savings account.
Whereas, in FDs you tell bank that you are not going to touch your money before after 1 year or 2 year. So banks know that they can use your money for next 1 or 2 years and can lend this amount to someone who needs money and can charge higher interest rate and pay you more accordingly.
How Does It Work?
Let’s break it down with an example:
- You deposit Rs. 50,000 in a Fixed Deposit for 1 year.
- The bank promises to pay you an interest rate of 6% per year.
- After 1 year, the bank will give you your Rs. 50,000 back, plus the interest, which is Rs. 3,000 (6% of Rs. 50,000).
So, after 1 year, you’ll have Rs. 53,000. Pretty simple, right?
What’s the Catch?
The main thing you need to know about Fixed Deposits is that you cannot touch the money for the entire time you agree to. If you need to withdraw it early, the bank will usually charge a penalty or give you less interest than what was originally promised. So, you need to be sure that you don’t need that money for a while.
How to Choose a Fixed Deposit
When you’re looking for different Fixed Deposit options, you might notice that there are several types.
So look for following points before choosing the FDs
Check the Interest Rate: Different banks and financial institutions offer different rates. It’s always good to compare and find the best rate for your chosen time period.
Compounding Time: This is an important point. Banks pay interest on your Fixed Deposit at certain intervals, like every 3 months, every 6 months, or annually. Compounding is just a term which is made so complex by finfluencers.But, It is nothing but the frequency on which bank adds interest to your principal. For example if a bank says that they compound interest quaterly it means they calculate interest after every three months and adds it to the initial principal. Say if you deposit $1,00,000 in bank and after three months you earn interest of $1000 so your principal now becomes $101000 and when the next time interest will be calculated it will be calculated on amount $1,01,000 rather than $1,00,000. Here’s what you need to know about the compounding frequency
- Annual Compounding: Interest is added once a year. So, if you invest for 1 year, you’ll get interest at the end of the year.
- Quarterly Compounding: Interest is added every 3 months. This implies that you get interest added to your deposit more frequently, so your money grows faster.
- Monthly Compounding: Some banks offer monthly compounding, where you get interest added every month. This is the most frequent, and you’ll see your money growing the fastest with this option.
When comparing Fixed Deposits, always check how often interest is compounded. The more frequent the compounding, the more money you’ll earn by the end of the term.
Important: If there are three FD options which assures you 7% interest rate but option A compounds interest rate monthly and option B compounds it quarterly and option C compounds it annualy. So in Option A you will earn more returns, as interest is being added to principal every month unlike option B and C where interest is being added to pricipal every 3 month or annually.
How to Search for Fixed Deposits
Here's how you can search for fixed deposits from different banks:
- Visit Bank Websites: Most banks list their Fixed Deposit rates online. Check out their pages to see the current rates.
- Use Comparison Websites: There are websites that compare FD rates from different banks, making it easier for you to find the best one.
- Talk to Bank Representatives: You can visit your local bank and speak with a bank representative to ask about their Fixed Deposit plans.
Make sure to compare:
- Interest rates: Check which bank offers the best rate.
- Compounding frequency: See how often they add interest to your FD.
- Penalty for early withdrawal: Know the rules if you need to take your money out early.
Is Fixed Deposit Risky?
One of the biggest benefits of a Fixed Deposit is that it is low-risk. This is because the bank guarantees that you will get your initial deposit back along with the predecided interest, as long as you stick to the agreed time period.
However, there are still a few risks to keep in mind:
Inflation Risk: If inflation (the general rise in prices) goes up, your Fixed Deposit returns may not be able to beat inflation. For example, if inflation is 7% but your FD gives you 6%, your purchasing power will actually decrease over time.
Early Withdrawal Penalties: If you need to take your money out before the end of the term, you will lose some of your interest, or even a portion of your principal in some cases.
Interest Rate Fluctuations: Interest rates can go up or down, and if you lock your money in a Fixed Deposit at a low interest rate, you might miss out if rates rise in the future.
But overall, a Fixed Deposit is much safer compared to other investment options like the stock market, where the value of your investment can go up and down. So, if you're looking for a safe and predictable way to grow your money, Fixed Deposits are a good choice.
Final Thoughts
To sum it up, a Fixed Deposit is a simple and safe way to save money and earn interest. You choose how long you want to lock away your money, and the bank rewards you with interest. The key is to pick the right FD based on interest rates, how often interest is compounded, and whether you can afford to leave the money untouched for the agreed period.
Before you choose to invest in FD, make sure to shop around and compare different options to find the best deal. And remember, although Fixed Deposits are low-risk, they won’t necessarily give you the highest returns compared to other investment options.
Please share this blog with your peers who wish to learn about finance.
For : Type of FDR
https://budgetbetternow.blogspot.com/2024/11/types-of-fixed-deposit.html
Comments
Post a Comment