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Banks are called custodians of public money and mobilization of the deposits from the public is the most important function of the commercial banks. When money is deposited with a “tenure” , it cannot be withdrawn before its maturity fixed at a particular time. Such deposits are called “Time deposits” or “term deposits”. The most common example of Time deposits is “Fixed Deposit”. All time deposits are eligible for interest payments. Interest rate depends upon the tenure and amount of deposit. This rate varies from bank to bank. The interest rate is generally higher for time deposits of longer tenure.
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Fixed deposits generally have a lock in period and an investor cannot withdraw money from his fixed deposit before the lock in period is over. If in any unforeseen circumstances, the investor needs to withdraw money from his fixed deposit, he will need to break his fixed deposit. On breaking the fixed deposit, investor becomes liable for a fine of 0.5-1% on interest rates.
Safety has always been a consideration while investing. Investors need security on their capital and the assurance of returns. From this point of view, bank and NBFC Fixed Deposit schemes have always been attractive options as they are regulated by the rules laid down by the Reserve Bank of India.
There is a famous saying “Variety is a spice of life”. So fixed deposit can be of different types.
Tax Saver Fixed Deposits
These are long-term FDs. Generally, your investment is completely locked down for a period of five years. But, you still get the benefit of tax deduction through these FDs. The principal amount you invest in tax saver FDs are exempt from taxation, with an upper limit of Rs.1.5 lakhs per FD.
Callable Fixed Deposits (FDs)
The FDs currently offered by banks are known as callable fixed deposits. Here you can withdraw the FD amount anytime before maturity and banks charge some penalty for this. But there is no lock-in period for such FDs and you can get your amount deposited immediately (in most cases). The term 'calling an FD' means withdrawing the FD, or in other words, callable FD means the depositor is calling his FD for withdrawal.Non-callable Fixed Deposits (FDs)?
In this case non-callable fixed deposits are similar to callable FDs but the major difference is that non-callable FDs cannot be withdrawn or closed before maturity. These are hence completely locked and the depositor has no authority to close it prematurely.Flexi Fixed Deposits
These are FDs linked to your savings account. You can create an FD with an initial deposit and link it to your savings account. You can also set a cap on your savings account and any excess will be transferred to the FD.
Standard Fixed Deposits
These are offered for tenures ranging from 7 days to 10 years. The longer the tenure, the higher the interest earned. The rate of interest is unaffected by market fluctuations because it’s set at the time of creation of the FD.Cumulative fixed deposit
In a cumulative fixed deposit scheme, there is no fixed interest that is payable over a quarter, half year or every year. For example, the interest rate is compounded every year or every quarter and paid at the end of the tenure.
Say, you place a fixed deposit for Rs 1 lakh per year. Every year you should get an interest rate of Rs 10,000 annually on a simple rate of interest. Therefore, if the deposit is placed for one year, you should get back Rs 1.10 lakhs.
Non - Cumulative fixed deposit
In this case of non cumulative scheme the interest is paid every quarterly, annually or every month as the firm may decide. Thus if its is paid every quarter the individual would get an interest rate of Rs 2500 every quarter.
You can opt for Differetmt types Bank FD if your financial goals are:
- To earn returns between 8.5–9.5% p.a (differs from bank to bank, period of deposit and with individual’s age)
- Not willing to take much risk for aforesaid return (Guaranteed returns every year that get compounded until maturity)
- Need liquidity in investment for general purpose (Bank FDs can be withdrawn prematurely with payment of some penalty charges.)
- Can need collateral loans anytime (A person with a bank FD is lowed collateral loans up to 90%)
- Have no other regular source of income (Interest can be deposited back to be compounded or can be withdrawn monthly/quarterly)
If you can relate to the above goals FD is your cup of tea. If you are a person whose income is beyond the taxable limit and probably much higher, investing in Bank FDs will not be recommended as the entire income earned from FDs is taxable.
I will suggest you to invest in FD, only if you want to take less risk and fixed return. If you can take more risk than there are many investment avenues with higher returns
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