Fixed Deposit: Types & How to Choose the right one

When it comes to traditional saving and investment instruments, fixed deposits (FDs) are among the most popular investment vehicles. You park a corpus in an FD account, where it generates interest at a pre-defined interest rate. The interest rate of FDs is fixed, so your returns are reliable. To make the most of your investment in an FD, it is crucial to opt for the one offering you the best benefits. It should suit your requirements as well. Here is a guide on how to choose the right FD.

The types of Fixed Deposits available

First, check which type of FD account is suitable for you:

1. Standard FDs

Here, the investor parks his money in the FD account for a fixed term that ranges from 7 days to 10 years. The fixed and pre-defined interest rate is higher than a regular savings account. You can avail of loan and overdraft facilities against standard FDs. You can also withdraw your money before the account matures, though you will be penalised.

2. Tax-saving FDs

These FDs have a mandatory lock-in period of five years, so you cannot withdraw your money prematurely. Moreover, loan and overdraft facilities are not available against tax-saving FDs. But you can claim tax exemptions of up to Rs 1.5 lakh under section 80C of the Income Tax Act. 

3. Cumulative FDs

The interest on these FDs gets compounded as per the interval of your choice. The interest is added to your investment amount and will be paid on the maturity of the FD.

4. Non-cumulative FDs

With these FDs, you can choose the regularity at which the interest is paid out. It is a good investment for those looking for a regular source of income. 

5. Senior citizen’s FD

These are for people above 60 years old. They offer better FD interest rates than Standard FDs. The tenure here can range from 7 days to 10 years.

6. Flexi FDs

These FDs offer you the convenience and flexibility of an FD and a savings account. They merge the features and benefits of FDs and savings accounts, so you get the higher interest rates of FDs plus the liquidity of savings accounts.

How to choose the right Fixed Deposit?
 

1. Interest rate

Choose a bank that offers you a high-interest rate on your FD account. Interest rates differ from bank to bank; longer tenures often attract higher interest rates. The interest rate may also vary depending on your age, as senior citizens get an additional interest rate.

2. Loan facility

One benefit of FDs is the loan facility that they offer. Investors can get up to 90% of their deposit as a loan. You may want to choose an FD account that gives you the highest value against your FD. And, of course, make sure you opt for an FD where a loan facility is possible in the first place.

3. Lender’s credibility

FDs are relatively risk-free but always check the credibility of the bank where you wish to invest. When selecting an FD, look at its CRISIL or ICRA ratings.  FAAA is the highest rating given by CRISIL and MAAA is the highest rating given by ICRA for credit quality.

4. Premature withdrawals

There could be occasions that will require you to withdraw money from your FD account prematurely. Banks charge a penalty by lowering the interest rate by 0.5% to 1% when this happens. Select a bank that imposes a low penalty on premature withdrawals.

5. Cumulative vs. non-cumulative

If you do not require regular passive income from your FDs, then you may want to choose cumulative FDs. The interest component on these FDs increase because of the power of compounding. This is a great way to earn better returns on your FD investment.

Summing up

Today, a wide variety of investment options are available in India and some of them are fast becoming popular too. Even then, few can match the security offered by Fixed Deposits (FDs), an ideal investment tool for the risk-averse investors. Choosing the right FD from reputed financial institutions is a good way to nurture your wealth in a secure and consistent manner. To explore your options and estimate the earning potential, you can use an FD calculator. IDFC FIRST Bank offers Fixed Deposits with interest rates up to 7.90%* p.a. for regular FDs and up to 8.40%* p.a. for senior citizens.

*Interest rate applicable on a tenure of 400 days to 500 days.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.