Fixed deposits are arguably the most popular investment
option among Indians. It should be a part of your investment portfolio,
regardless of whether you are a beginner or a seasoned investor. This is
because of the many advantages that come with a FD account:
Fixed deposits add stability to your portfolio as they are
among the safest investment options available. You should use them to balance
your riskier investments and lower the overall risk exposure of your portfolio.
Fixed deposit accounts earn an assured return and there is
no risk of losing the principal amount. This allows you to plan ahead and build
a corpus for a large expense as required.
FD rates on deposits already made are not linked to the
performance of the market, and you do not have to worry about the many
fluctuations.
You can opt for a periodic interest payout to manage your
regular expenses, as required.
No TDS is deducted on the interest earned on your fixed
deposit account up to ₹10,000 per year.
Most fixed deposit accounts offer a loan against fixed
deposits as well. This loan can be up to 75% of the total principal deposited
in your fixed deposit accounts. As the deposit acts as a collateral for these
loans, the interest charged can be very attractive as well.
Fixed deposits are considered near-liquid as you can make a
premature withdrawal from your fixed deposit account at a nominal fee deducted
as a penalty on the fixed deposit rate earned.
Types of Fixed Deposit
Broadly, fixed deposits account can be classified into three
types:
1. Cumulative Deposit: The interest earned on these
types of fixed deposit accounts is credited to the fixed deposit annually. It
is paid out on maturity along with the principal. As the interest gets
compounded, your savings can grow rapidly over the years. This is a great
option for anyone planning to build a corpus towards a large expense like
education or wedding.
2. Non-cumulative Deposit: The interest earned on these
types of fixed deposit accounts is paid out to the depositor at an agreed-upon
frequency. The frequency of the payment can be set as monthly, quarterly,
half-yearly or annual. The regular interest payments supplement your regular
income can be used to meet your daily expenses as required.
3. Tax Saving FD: This is a special type of cumulative
fixed deposit which has a lock-in period of five years. It can be used to save
tax under section 80C of the Income Tax Act. No partial or premature withdrawal
is allowed under this scheme. This is a great option if you have no utilized
the limit available under Section 80C. Among all the options available under
80C, tax-saving FDs have the lowest lock-in periods. Remember that tax-saving
FDs are illiquid and you should opt to invest in these only if you are okay
with the money being locked up for five years.
: Types, Suitability and Advantages){kind=link}