Fixed Deposit: Earn as you save
The fixed deposit guarantees capital appreciation while encouraging the savings habit. Here’s looking at how it benefits your financial goals.
Though most of us won’t admit it, each of our lives mirrors those of the earlier generations’. Just like our parents before us, we grow up, get jobs, assume responsibilities for our families, make our loved ones’ dreams come true, and then retire. But where our parents did not have too many avenues for wealth creation, you are luckier in that respect: today, there are scores of investment options and the latest technology to help you create wealth for the future.
And yet, you keep going back to the tried and tested: options like fixed deposits get a universal stamp of approval because they are more sedate than market-linked options. Not only do they show capital appreciation, they are also one of the safest ways to save money. Most conservative investors who wish to create wealth without too much underlying risk are bound to make a beeline for fixed deposit accounts. This article examines the benefits of creating the FD and how it is a key player in creating future wealth in a secure manner.
Save and earn with fixed deposits
The fixed deposit is a sum of money that you set aside as a lump sum in a bank account specially created for the purpose. It is set aside for a certain period (known as ‘term’ or ‘tenure’) and it earns by way of the fixed deposit interest rate paid by the bank.
You may not always be able to set aside regular savings every month, what with rising living expenses and high inflation. But when you create a fixed deposit, you automatically end up saving a large sum of money and also earning good interest on it. It is a better option than saving money in the bank account, since the fixed deposit interest rate is higher than that of savings bank accounts. The same sum of money, say Rs 2 lakh, would fetch more earning by way of fixed deposit interest rate than with the savings account interest rate in most cases.
How fixed deposits work
You can approach your bank to create a fixed deposit account for you. It is not mandatory that you must open an FD only with the bank where you have a savings account. All banks offer FDs, but you must open a separate FD account with the bank to deposit the money. A few leading banks also offer the opportunity for online FD account opening – you don’t need to visit the bank branch or sign out any paperwork to make the deposit account operational.
This is how it works: You can use a fixed deposit calculator online to find out how much the investment will grow at the end of the desired tenure, at the rate of interest decided by the bank. After you make your calculations, you can initiate the opening of the FD account with the bank. Once the account is created, the principal sum is invested in it. On maturity, i.e. when the deposit tenure is up, your initial investment is returned to you along with the interest payable on it.
Why fixed deposits matter for wealth creation
You might argue that fixed deposit returns are not as high as other options’, say equity mutual funds. While this might be true in certain cases, do consider the following points in favour of investing in fixed deposits:
* The returns are guaranteed. Unlike market-linked instruments, where the returns may not always be commensurate with predicted trends, you can be certain that your FD will grow by a certain margin.
* The interest never wavers. The biggest benefit of investing in the fixed deposit is that the fixed deposit interest rate remains constant throughout the deposit tenure. Whether rates fluctuate in the market or not, the bank pays the pre-decided interest on the FD with no changes. Thus, you can chart out the deposit’s eventual growth at the outset.
* You can time it to coincide with major milestones. Since you are aware of the margin by which your fixed deposit will grow at maturity, and since you have the flexibility to choose the deposit tenure, you can time the maturity date to coincide with a future milestone. Suppose you wish to buy a new car in four years, you can create an FD account for a tenure of four years such that the principal amount grows to a sum that can make the car’s down payment. In fact, you can create a series of FDs of varying tenures so that they fulfil various future goals along the way.
* FDs are quite liquid. There might come a time when you require an urgent infusion of funds. When this happens, you can choose to terminate the FD and get back your investment. However, you will lose any interest earning on the FD. Leading banks in India do not charge any foreclosure penalty on premature termination of the FD.