5 fact guide to understanding your fixed deposit

Ask any individual about their most preferred choice of investment option and everyone will indicate the fixed deposit. While there are plenty of reasons as to why this is a preferable option for investments, as compared to others, this is the least risky.

Additionally, you only need to put in a lump sum amount for a fixed time and earn interest during that tenure. In order to make the most out of your investment in this option, you will need to understand the factors behind it. Given below are a few important factors you can consider with this termed deposit:

Fixed returns: When investing in this termed deposit, your funds are parked in a particular bank deposit for a fixed period. The bank or financial institute where you are investing your funds in, will provide you with a fixed interest in exchange for holding your funds. This is the reason why the deposit is termed as a safe option. You will earn profit from this investment, through the form of interest. Depending on your profile or age, you can earn a higher interest. 

Tenure of your choice: With this term deposit, there is a variety of tenure which is available as per your choice. This term can last between 6 months to 10 years depending on your will. The longer you keep your tenure, the more interest you will earn.

Interest payout: The deposit of the interest earned can also be decided on your desire. This can be done when the deposit matures or even at regular intervals. Normally a bank or financial institute will offer a deposit of interest at quarterly, half-yearly or annual intervals.

Loan against your fixed deposit: When you are in immediate need for funds, there is no need to break your fixed deposit. In this case, you can always take a loan against the termed deposit and use it to satisfy your needs. However, the amount of funds that you withdraw is limited. It also depends on your financial profile and your relationship with the bank. Additionally, you may also need to pay interest on the funds that is borrowed.

Tax savings: Plenty of banks and financial institutes provide tax saving schemes along with fixed deposit services. In this case, the total taxable income that you earn is reduced by the amount you save in this deposit. The depositor must ensure that the tenure of the deposit is in between 5 years to 10 years. The maximum amount you are allowed to invest in such deposit for tax purposes is also fixed at 10 lakhs. However, the interest that you earn in this case will be taxable.

Simple versus compound interest rates for fixed deposits

Fixed deposits are a great way to invest your funds, especially on a long-term basis. They also offer a great protecting against the volatile conditions of the financial market. With this termed deposit, you can invest a fixed amount and earn a return on the investment. Depending on the amount you wish to invest, you can easily earn a return on investment depending on the tenure.

However, you can earn an interest on your fixed deposit through two types. You can either opt for the simple interest method or the compound interest method. Given below are the details of the difference between these two types:

Simple Interest fixed deposit:

Simple interest is best for those who want to earn a small amount, and use it for any financial requirements at a fixed time. This is best for those who want to invest their funds, and yet have some access to using it. although the investment tenure is fixed, you will still have access to the interest that is earned and deposited at the ROI tenure.

Under the simple interest method, your interest is calculated on the initial deposit amount or the principal amount. However, in most cases, the interest amount will mostly calculate on the principal amount. Most of the interest rates are calculated on a quarterly, half-yearly or annually basis. You can use the fixeddeposit calculator to get the ideal amount that will suit your needs.

Compound Interest fixed deposit:

Compound interest, also known as the reinvestment option is great for maximizing returns on a long term basis. This also works well for those who would want to invest for a fixed yet long period of time In this case, the longer the deposit period, the better will be the returns on reinvestment.  Reinvestments under this scheme provide a higher return, especially for those who prioritize liquidity. This is also the best solution for long term deposits.

In the compound interest method, the interest is calculated on the principal and the interest that earned at each maturity period. With the interest that is earned in this form, the compounded outcome is much higher. This is because the interest that is earned is added to the principal amount. Thus, this becomes the basis of the interest calculation. To know how much you can earn with each compounding interest, you can always use the fixed deposit calculator to get the amount required. However, the compounding interest will differ in the different FD schemes offered by the institute. Normally, a bank or financial institute will offer scheme frequencies that are quarterly, half-yearly or annually.

If interest is calculated every month, the annual interest rate will have to be considered on a per month basis. Likewise, if it’s calculated every half-year, the annual interest rate will have to be calculated on a half figure.