Learn About the Different Types of Fixed Deposits in Detail

Fixed deposits are specific savings instruments offered by financial institutions. With an FD, an individual deposits a specific amount of money at a predetermined rate of interest for a period of time. The rate of interest offered on FDs is much higher than the interest rates offered on savings accounts.

However, unlike with a savings account, one cannot withdraw their deposits as they please. Premature fixed deposit withdrawals will likely cost the depositor by way of premature withdrawal penalties. Some financial institutions will also deduct any interest accrued or credited when the depositor opts for a premature withdrawal.

There are different types of fixed deposits available in the market. You can choose an FD that suits your financial needs best. Here are some of the most popular FDs and their key features to help you make an informed decision:

Cumulative FD

A cumulative FD is the most popular types of FDs. With a cumulative FD, your interest is accrued throughout your deposit period. This means that as time goes on, your interest accrued will also start accruing interest. This way, you can take full advantage of the power of compounding and make the most of your savings. The deposit amount, along with the interest accrued is paid to you at the end of the maturity period.

A cumulative FD could be a great choice for anyone to make the most of savings without taking on much risk. It’s also ideal for those who do not have an immediate requirement for the deposited money or do not need regular source of income.

Non-cumulative Fixed Deposit

A non-cumulative FD is a type of FD wherein the interest accrued is paid out to the depositor in regular intervals, as indicated by the depositor. This can be monthly, quarterly, half-yearly or yearly. While a non-cumulative FD doesn’t take full advantage of the power of compounding, it’s a great option for people who require a regular source of income.

A non-cumulative FD is usually a great option for retired individuals, freelancers and homemakers who require a steady source of income periodically.

Flexi Fixed Deposit

A flexi FD is a special kind of fixed deposit that combines the liquidity of savings accounts and the higher interest rates offered by fixed deposits. With a flexi FD, the excess balance of the predetermined amount is transferred to the fixed deposit account automatically for a default term of one year.

A flexi FD is perfect for anyone that’s looking to grow their savings while maintaining liquidity.

Tax-saving Fixed Deposits

A tax-saving FD is a type of fixed deposit that offers tax savings through deductions under Section 80C of the Income Tax Act, 1961. Generally, with a tax-saving FD, you can make one-time deposits of up to ₹1.5 Lakhs. These deposits come with a lock-in period of 5 years and cannot be withdrawn prematurely.

A tax-saving FD is a great option for anyone that’s looking to save on taxes while also growing their corpus steadily.

Senior Citizen FD

Senior citizen FDs are offered only to those aged 60 and above. These FDs typically come with higher rates of interest than other FDs. Most financial institutions offer an additional interest rate ranging from 0.25% per annum to 0.75% per annum on top of the applicable interest rates. Retired individuals generally save in FDs as they are relatively safe and unswayed by market conditions.

You must now be familiar with the types of FDs available in the market. Let’s now take a look at some points to consider before choosing an FD to help you make informed decisions.

1. Interest Rates

One of the most important aspects of any financial instrument is the return on investment. With an FD, your interest rate is one of the biggest determiners of returns. A higher interest rate will yield higher returns and vice versa. This is why it’s important to always shop around, understand the industry standards before zeroing in an FD.

2. FD Tenor

Generally, you can choose your preferred tenor. This can range anywhere from 7 days to 10 years. Analyse your financial situation and requirements to arrive at a tenor that’s ideal for you. With cumulative FDs, you might be better off opting for a fairly longer tenor as this can help you realise higher profits.

3. Liquidity

Liquidity refers to the ease with which your savings can be converted into cash without affecting its market price. An FD is a great option for those who need higher levels of liquidity while also getting the benefit of steady growth.

4. Additional Facilities

There are a number of added benefits to saving in an FD. Different financial institutions offer different types of facilities that you can opt for based on your needs. You can get loans, overdrafts and even credit cards against your FDs. Since these debt instruments are secured, you’re likely to get better rates and terms.

Final Words

An FD is a great way to grow your savings without subjecting it to volatile market conditions. There are a number of options in the market for fixed deposits depending on your financial needs. Some of the most common ones include cumulative, non-cumulative, flexi, tax-saving and senior citizen fixed deposits. In this article, we’ve also highlighted some points to keep in mind before choosing an FD to help you make better financial decisions.