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Fixed Deposit Explained and How It works

Fixed Deposit Explained and How It works

Fixed deposit, or commonly referred to as “FD” is a type of bank savings or investment account that promises the investor (person) a fixed rate of interest. In return, the investor agrees not to withdraw or access his / her funds for a fixed period of time.

In a fixed deposit investment, interest is only paid at the very end of the investment period Because the investment term and interest rate are fixed, you can easily calculate the amount of interest you will earn at the end of any fixed deposit investment. It is known as a term deposit or time deposit in Canada, Australia, New Zealand, and the US, and as a bond in the United Kingdom and India.

Each “tenure” or term comes with a predetermined interest rate. For example, banks normally quote their fixed deposit interest rates in a table similar to the one below:

Tenure/Term Interest Rate (% p.a.)
1 month 3.00
2 months 3.40
3 months 4.00
6 months 5.10
12 months 6.25

What this means is , if you invest in a fixed deposit with a 3 month term, you will be entitled to an interest rate of 4.00% p.a. at the end of three months. If you invest 10,000 for 12 months with the interest rate of 6.25%, you will get a return of 625 at the maturity of your fixed deposit.

These investments are safer than Post Office Schemes as they are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, DICGC guarantees amount up to ₹ 100000(about $1555) per depositor per bank. They also offer income tax and wealth tax benefits. The interest rate can go higher than the standard rate if you invest a larger sum of money

emmanuelchibike Emmanuel Chibike(Master) Did you learn anything? Yes No        

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......................... is a type of bank savings or investment account that promises the investor a fixed rate of interest