Fixed deposit: Explained
BY TIO Staff
|July 12, 2024In the world of finance and trading, a fixed deposit is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account. 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.
Fixed deposits are a high-interest-yielding Term deposit and offered by banks in India. The most popular form of Term deposits are Fixed Deposits, while other forms of term Deposits are recurring deposit and flexi fixed deposits (the latter is actually a combination of Demand deposit and Fixed deposit).
Understanding Fixed Deposits
To begin with, fixed deposits are a type of savings account or bond that promises the investor 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, money is deposited once, for a defined period of time.
Fixed deposits are a safe investment option that guarantees consistent interest rates, relative safety, and easy management of savings. They are a good option to increase your savings, as the interest rate is higher compared to a regular savings account. It is the most preferred form of investment in India as it is a one-time investment and the interest rate is higher compared to a savings account.
How Fixed Deposits Work
When you invest in a fixed deposit, the money is deposited in the bank for a specified period of time. The bank pays interest on the money at a rate determined at the time of the deposit. The interest rate is fixed and will not change over the term of the deposit.
At the end of the term, the total amount of money (the initial deposit plus the interest) is returned to the investor. The term of a fixed deposit can range from 7 days to 10 years. The longer the term, the higher the interest rate.
Benefits of Fixed Deposits
Fixed deposits offer a number of benefits to investors. Firstly, they are a safe investment. The returns on fixed deposits are guaranteed, and there is no risk of loss of principal. This makes them a good option for conservative investors.
Secondly, fixed deposits offer a higher rate of interest than regular savings accounts. This makes them a good option for people looking to earn a higher return on their savings. Finally, fixed deposits are easy to manage. They require very little maintenance and can be opened and closed easily.
Types of Fixed Deposits
There are several types of fixed deposits available to investors. These include regular fixed deposits, tax-saving fixed deposits, senior citizen fixed deposits, and recurring deposit schemes.
Regular fixed deposits are the most common type of fixed deposit. They offer a fixed rate of interest over a specified period of time. The interest is usually paid at the end of the term, although some banks offer a monthly interest payment option.
Tax-Saving Fixed Deposits
Tax-saving fixed deposits are a special type of fixed deposit. They offer tax benefits to the investor under Section 80C of the Income Tax Act. The maximum amount that can be invested in a tax-saving fixed deposit is Rs. 1.5 lakh per annum.
The term of a tax-saving fixed deposit is 5 years. The interest earned on a tax-saving fixed deposit is taxable, but the principal amount is exempt from tax.
Senior Citizen Fixed Deposits
Senior citizen fixed deposits are a type of fixed deposit that is available only to senior citizens. These deposits offer a higher rate of interest compared to regular fixed deposits. The minimum age to open a senior citizen fixed deposit is 60 years.
The term of a senior citizen fixed deposit can range from 7 days to 10 years. The interest is usually paid at the end of the term, although some banks offer a monthly interest payment option.
Fixed Deposits and Trading
Fixed deposits play a crucial role in the trading world. They are often used as a safe haven for investors who want to ensure a certain return on their investment, especially during volatile market conditions. They can also be used as collateral for trading on margin.
Furthermore, the interest rates on fixed deposits can influence the trading environment. Higher interest rates can attract foreign investors, strengthening the domestic currency. Conversely, lower interest rates can deter foreign investors, weakening the domestic currency.
Fixed Deposits as Collateral
Many trading platforms allow traders to use their fixed deposits as collateral for margin trading. This means that traders can leverage their fixed deposit to trade larger positions than their account balance would normally allow.
Using a fixed deposit as collateral can be a powerful tool for traders, but it also comes with increased risk. If the trades go against the trader, the fixed deposit may be used to cover the losses.
Interest Rates and Trading
Interest rates on fixed deposits can have a significant impact on the trading environment. When interest rates are high, fixed deposits become more attractive, potentially drawing investment away from riskier assets like stocks and commodities.
On the other hand, when interest rates are low, fixed deposits become less attractive, potentially pushing investment towards riskier assets. Traders need to keep an eye on interest rates and understand how they can impact their trading strategies.
Conclusion
Fixed deposits are a key financial instrument in the world of trading and finance. They offer a safe and reliable investment option with a guaranteed return. They also play a crucial role in the trading environment, influencing investment flows and currency strength.
Whether you're a conservative investor looking for a safe place to park your money, or a trader looking to leverage your assets, understanding fixed deposits is crucial. So, the next time you're considering your investment options, don't overlook the humble fixed deposit.
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