Despite the fact that the interest rates on fixed deposits have declined over the years, it is still preferred by the majority of people due to the safety and security it offers. In addition, it is one of the most simple and easy-to-understand investment schemes, as it does not require specialized knowledge or skills before investing.
Moreover, specific tools nowadays are available such as the FD calculator. This makes the entire investment procedure easier as it helps the potential investor know beforehand what they’ll be reaping from their initial investment.
What is a fixed deposit?
A Fixed Deposit or FD is a type of investment scheme offered by financial institutions/banks where an individual or entity can deposit a lump sum amount of money for a fixed period of time at a predetermined rate of interest. This investment instrument is also known as a Time Deposit or a Term Deposit.
The rate of interest offered on this investment depends on the amount of money deposited, the tenure, and the policies of the financial institution opted. However, the interest rate is usually higher than what is offered on a savings account or even other types of bank accounts. Moreover, they are considered to be a low-risk investment option, as the bank assures the principal amount and the interest amount earned.
What are its advantages?
Fixed FD interest rate
The interest rate on this investment scheme is usually fixed and higher than those offered on a savings account. Therefore, this makes them an attractive investment option for those willing to earn a steady income.
It offers guaranteed returns on the principal amount deposited by the potential investor, irrespective of what happens out in the market. This ultimately makes it a safe investment option, especially for risk-averse individuals.
Fixed Deposits are considered to be a low-risk investment option. This is because, simply, the principal amount and the interest earned are assured by the bank. This makes it a suitable investment option for risk-averse investors who want to protect their capital.
FDs are flexible in nature and offer flexibility in tenure and the initial investment amount. The depositor can choose a tenure ranging from a few days up to several years, and the amount of investment can also vary according to their requirements.
Why have FD interest rates declined over the years?
It is a well-known fact that over the years, the FD interest rate has come down. This is because this rate is influenced by a range of factors and are subject to change from time to time. However, being a citizen of this country, you must stay informed about the latest interest rates offered by financial institutions before investing your hard-earned money.
The first and foremost factor that affects the fixed deposit rate of interest is inflation. As inflation rises, the Reserve Bank of India (RBI) reduces the interest rates in order to curb inflation. This, in turn, reduces the interest rates the financial institutions offer on FDs.
Financial institutions need to maintain a certain level of liquidity to meet the demands of their customers. To maintain liquidity, banks may reduce the rate of interest on FDs to encourage customers to withdraw their money.
Global Economic Conditions
Such conditions can also affect the rate of interest offered by banks in India. For example, if the economy weakens, banks might reduce interest rates to encourage borrowing and investment.
(Tip: Use a FD calculator before investing your money. It gives a clear idea of what you’ll reap out of your investment.)