In this post, find the full form of FD and how FD works. Learn about the benefits of FD as well as the many forms of FD.
Customers of banks and non-banking financial firms (NBFC) can invest in a fixed deposit (FD) to save money and get a higher return. You will receive the lump sum, in addition to the interest, after the term, making this an excellent method for conserving money.
What’s FD and How Does an FD Work?
The full form of FD is Fixed Deposit.
A fixed Deposit (FD) is a type of deposit that banks in India offer that pays interest.
One way to look at it is as a contract between the depositor and the bank for a specific amount of time.
FD stands for “Fixed Deposit,” which refers to a deposit that is kept by a bank or other financial institution for a predetermined amount of time following an agreement between the depositor and the bank.
When you open a savings account with a bank, you have the opportunity to take money out of that account at any moment, even though it is considered a savings account.
But you won’t always be able to get your hands on the cash in your fixed deposit account.
You are able to make a single withdrawal from the fixed deposit or many withdrawals before the due date.
If you withdraw your fixed deposit before to the specified deadline, the bank will charge you a fee equal to a percentage of the amount withdrawn.
FD accounts come with restrictions on the quantity, frequency, and/or duration of withdrawals, but they offer a greater interest rate compared to standard savings accounts.
Benefits of Fixed Deposit
Customers may place fixed deposits with the bank with terms ranging from seven days to ten years, with the minimum term being seven days and the highest term being ten years.
On the other hand, the interest rates that are offered by fixed depositors are noticeably higher than the interest rates that are supplied by conventional savings accounts.
Until the date of maturity that has been selected, it offers investors a rate of return that is higher than the typical rate of return offered by savings accounts.
The most important advantages of FD are as follows:
How Interest in FDs is Worked Out
The following formula is used to figure out the interest on FDs.
A = P(1 + rn)n * t
The full form of the formula’s variables:
A: Maturity interest
P: Principal amount
R: Rate of interest
n: Compound interest frequency
t: Duration
What you need to know before you open an FD account
Before opening a fixed-deposit account, there are a few things that must first be understood, which are detailed below.
There are 5 kinds of fixed deposits.
Depending on their business strategies, all financial institutions provide customers with a variety of deposit options.
The deposits are made available by the banks and can be distinguished by their interest rate, principal amount, duration, tax status, or other characteristics.
The characteristics of these 5 deposits are as follows:
1. Cumulative/Compound Interest FD:
The interest collected from the cumulative fixed deposit is reinvested in the FD account. At the end of the agreement, the amount is returned with compound interest and principle amount.
2. Corporate FD:
Putting money into corporate fixed-income securities carries some level of risk. However, in comparison to those of other banks, the interest rate will be higher.
3. FDs for Non-Resident Indians (NRIs):
NRIs are eligible to submit applications for fixed deposits known as non-resident external (NRE) and non-resident ordinary (NRO).
You are able to invest the sum in several foreign currencies through the bank. NRE Fixed Deposits do not attract tax, however, NRO Fixed Deposits do attract a tax of 30%.
4. Floating FD:
The interest rate that is calculated and applied to the total amount of floating fixed deposits is the same as the rate of interest that is currently in effect.
The Reserve Bank of India is in charge of determining interest rate policies (RBI).
5. Flexi FD:
There is a connection between a flexi fixed deposit and a savings account. Because of this deposit, the bank is able to automatically liquidate and transfer funds between the savings account and the FD account.
It helps keep a minimum balance between the fixed-deposit account and the savings bank account.
