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What is Fixed Deposit? How does it Work?

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A fixed deposit is a well-liked financial instrument provided by banks and financial organisations. It is sometimes referred to as a term deposit or time deposit. A set sum of money is deposited with a bank for a predetermined period of time at a fixed interest rate in this sort of investment.

For the duration of the agreed-upon term, which can be anywhere from a few months to several years, both the initial investment and any interest accrued are locked-in.

How fixed deposits work?

The following list will help to illustrate how fixed deposits works.

  • Deposit Amount and term

The deposit amount and term are choices made by the investor when opening a fixed deposit. The deposit is normally made in a flat payment, and the investor determines the tenure based on their needs and financial objectives.

  • Fixed Interest Rate

When a fixed deposit is opened, the bank offers a fixed interest rate. Regardless of any fluctuations in market interest rates, this interest rate is fixed for the duration of the deposit. Depending on the deposit amount and the deposit time, the interest rate may change.

  • Lock-In Period

The amount invested and the interest generated is locked in for the duration of the fixed deposit after it has been started. Without incurring fees or losing some or all of the income received, the investor cannot withdraw the money before the maturity date.

  • Interest Payout choices

Cumulative and non-cumulative interest payout choices are available to investors. In a cumulative fixed deposit, interest is accrued in addition to the principle and reinvested to generate more interest. As a result, the dividend at maturity is increased. A non-cumulative fixed deposit offers a consistent income stream to the investor by paying interest at regular periods, such as monthly, quarterly, or annually.

  • Safety and Low Risk

Due to the bank’s guarantee, fixed deposits are regarded as safe and low-risk investments. The principal amount and interest earned up to a specific maximum are secured by deposit insurance offered by government authorities in most countries, even if the bank experiences financial difficulties.

  • Premature Withdrawals

Although fixed deposits should be held until they mature, some banks provide the option of making early withdrawals in case of emergency. However, depending on the tenure finished, this can come with fines and the interest gained might be diminished.

  • Automatic Renewal

Unless the investor chooses to withdraw the money or modify the terms, some fixed deposits may be automatically renewed at the current interest rates upon maturity.

Conclusion

Overall, fixed deposits provide a safe, dependable, and guaranteed way to increase your assets. They are appropriate for risk-averse investors wishing to preserve their capital and generate a stable income over a certain time frame.

However, in order to match the fixed deposit with their financial objectives and liquidity requirements, investors need carefully analyse the deposit tenure, interest rate, and payment alternatives.

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