Fixed deposits (FDs) have long been a popular investment choice in India, offering a secure and reliable way to grow your savings. With government-backed insurance and low-risk profiles, FDs have become a cornerstone of Indian financial planning.
In this article, discover why FDs are a trusted investment option, how they can help you achieve your financial goals, and is your FD investment safe.
What is a Fixed Deposit?
FD stands for Fixed Deposit. It’s a type of investment where you deposit a lump sum amount with a bank for a fixed period. In return, the bank pays you a fixed rate of interest at the end of the deposit term.
How does a fixed deposit work?
When individuals open an FD account, they deposit a specific sum of money for a period ranging from seven days to ten years. The deposited amount is usually kept untouched until the maturity of the FD.
The interest rate offered on a fixed deposit is determined by both the duration of the investment and the amount deposited. Generally, a longer investment term results in a higher interest rate. The interest earned is either credited to the investor’s savings account – with many banks requiring FD holders to maintain one – or reinvested into the FD at the end of the agreed tenure.
How safe is a Fixed Deposit?
According to information available on the official website of Axis Bank, several factors contribute to the safety of fixed deposits, such as;
1. Regulatory oversight: Fixed Deposits in India are considered safe owing to the regulatory oversight of the Reserve Bank of India (RBI). The RBI enforces strict regulations, ensures deposit insurance through the Deposit Insurance and Credit Guarantee Corporation (DICGC), conducts regular inspections and takes prompt corrective action when necessary. These measures collectively enhance the security of Fixed Deposits.
2. Deposit insurance: Deposit insurance schemes in India, administered by the DICGC, offer protection to depositors in case of bank failures. The current limit for insurance coverage is Rs 5 lakh per depositor per bank, providing an additional layer of security for your FD funds.
3. Stability of banks: Established banks with a strong track record of financial stability are generally considered safe options for FD investments. Before investing, it’s advisable to research the bank’s economic health and reputation in the market.
Assessing FD security measures
1. Deposit insurance schemes
Deposit insurance schemes protect depositors by guaranteeing repayment in case of bank insolvency or failure, enhancing investor confidence.
2. Guaranteed fixed returns
FDs offer predetermined interest rates, providing predictable and stable returns. This makes them attractive for conservative investors seeking security.
The Bank has also provided information about critical factors for evaluating FD security;
1. Interest rates: FD interest rates vary among banks and financial institutions. Before investing, it’s essential to calculate interest rates with the help of a Fixed Deposit Calculator to ensure maximum returns on your investment.
2. Tenure and liquidity needs: FDs have a fixed tenure, and premature withdrawal may attract penalties. You should carefully assess your liquidity needs and choose a tenure that aligns with your financial goals.
3. Inflation risk: While FDs offer security, they may not always be safe from inflation, leading to erosion of purchasing power over time. You should factor in inflation risk while planning your investment portfolio.
Types of FDs
There are various types of fixed deposits: Regular FDs for standard investments, monthly recurring FDs, tax-saving FDs, senior citizen FDs with higher interest rates, flexi FDs offering flexible deposit terms, corporate FDs issued by non-banking institutions, and FDs for children.
FDs From NBFCs
It’s essential to be cautious when investing in FDs offered by non-banking financial companies (NBFCs) or cooperative banks, as these may carry higher risks compared to traditional bank FDs. Checking the credit rating of the institution offering the FD is advisable to assess the safety of your investment.
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