Fixed Deposits- Features, Benefits, Disadvantages

03 Jul 2019

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A fixed deposit is one of the most popular investment options in India. Several people consider fixed deposits as the best investment option and invest a significant portion of their savings in this instrument. But what is a fixed deposit?

A fixed deposit is a type of deposit in which a sum of money is locked for a fixed period of time. However, the tenure for the fixed deposit is decided by the person who invests his funds. This tenure could be anywhere from a few days to several years. In return for locking in these funds, fixed deposits pay the depositor a fixed rate of interest. All banks offer fixed deposits at different rates. Opening a fixed deposit is extremely simple and can be done both online and offline. To understand whether investing in a fixed deposit is the best option, we need to look at the advantages and disadvantages of fixed deposit account.

Let us examine the fixed deposit advantages and disadvantages.

Advantages of Fixed Deposit:

Assured rate of return:

The major reason why people prefer investing their funds in a fixed deposit is the assured rate of return. Once you invest your funds in a fixed deposit account, you can be guaranteed of receiving the stated rate of return. Banks publish the fixed deposit rate of interest on their website and in bank branches which makes it easy for a customer to ascertain how much return he will get. Banks also have a fixed deposit interest calculator on their websites where a customer can calculate the interest he will receive on investing a particular sum of money for a particular period of time.

Tax threshold for interest:

Banks are not mandated to deduct tax on any interest until it crosses Rs. 10,000. This means unless the total interest earned by a customer on different fixed deposits totals Rs. 10,000, the bank will not deduct any tax. This provides comfort to small deposit holders.

Flexible tenure:

The tenure for a fixed deposit is flexible and depends on the deposit holder. Each bank has their own minimum tenure rules however, the final decision can be taken by the deposit holder. It is also possible to decide whether to redeem the fixed deposit or to extend it for the same period of time.

Easy liquidation:

It is relatively easy to liquidate a fixed deposit. For FDs booked online, they can be liquidated online via net banking as well. Otherwise, most bank branches have a form to liquidate the FD.

Loans against fixed deposit:

An FD is a dependable instrument to keep in case of financial emergencies. Taking a loan against a fixed deposit is very easy. You can take a loan up to 95% of the fixed deposit amount depending on the bank. This makes it a dependable investment.

Disadvantages of Fixed Deposit:

Reducing interest rates:

Even though fixed deposits have a lot of advantages, the interest rates do not move in line with inflation. This means in some cases, they may actually earn less than the inflation rate. The interest rates for fixed deposits have been falling in recent times which has reduced the attractiveness of this investment.

Locked in funds:

Fixed deposits lock in your funds for a fixed duration. These funds are not available for you to use unless you withdraw the funds prematurely. Fixed deposits are not at all liquid and cannot be converted into cash easily.

Penalties on withdrawal:

Banks charge penalty to the depositors who withdraw their fixed deposits prematurely. This penalty is in the form of a reduced rate of interest.

No tax benefit:

The interest earned on fixed deposit is added to the taxable income of the deposit holder. There is no deduction on any interest earned. However, senior citizens get a deduction up to Rs. 50,000 on interest.

Fixed interest rate:

The rate of interest on a fixed deposit remains the same for the entire duration of the fixed deposit. Even if the rates increase, the bank does not pay additional interest to the deposit holder.

After looking at the advantages and disadvantages of a fixed deposit account, it is clear that this is an instrument for people who do not have much of a risk appetite. If you’re a person who likes to see fixed income in his account, then this is the instrument for you. The earnings from this form of investment are limited. However, banks have a sweep in facility where excess funds from a savings account can be diverted to a fixed deposit until the customer needs these funds. By enabling this feature, you can increase the returns from your fixed deposit account.

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Features & Benefits Flexible Recurring Deposit Scheme

Flexible Recurring Deposit Scheme (Yatha Shakti Jama Yojana)
Bank of Baroda offers its customers a unique scheme that makes it possible for you to save money flexibly, month after month. You can avail the attractive Yatha Shakti Jama Yojana - a flexible recurring deposit scheme which comes with a host of benefits and salient features. Under the flexi recurring deposit scheme, depositors may choose a small core amount to open their deposit and increase the core amount subsequently, up to three times.
Features of the Flexible Recurring Deposit Scheme
Opening the flexi RD
The flexi RD can be opened with a small initial amount of Rs.100 only
Amount of deposit
Depositors may choose their initial amounts in multiples of Rs 100, up-to a maximum amount of ₹10,000. You may choose to deposit either your core amount or up-to 3 times your core amount. Core amount contributions are mandatory in this scheme.
Tenure of deposit
The tenure of the recurring deposit schemes range from 12 months to 120 months.
Interest payment
Interest on the flexi RD will be paid and credited on a half yearly basis in the months of September and March. The interest paid is calculated on daily balances, with half yearly compounding of interest.
Benefits of the Flexible Recurring Deposit Scheme
Additional interest rate benefits
Senior citizens with deposits below ₹1 crore are eligible for 0.50% additional interest. Staff and ex-staff members of Bank of Baroda are also provided with additional interest. Ex-staff members who are senior citizens can avail both bonus interest rates.
Nomination facility
Nomination facility is also offered to flexi RD holders.
Premature withdrawal facility
Interest is paid after deducting a penalty of 1% from applicable rates or contracted rates, whichever is lower in only those cases that are subject to charging penalty.
Loan and overdraft facility
You may avail a loan or overdraft facility against the flexi RD of up to 95% of the outstanding balance in your account at interest rates as per Bank of Baroda guidelines.
No penalty
No penalties are levied for delayed payments of monthly instalments.
No TDS will be deducted for persons submitting forms 15G/15H as applicable

How does Fixed Deposit Work

A fixed deposit is one of the most popular investment avenues in India, particularly among risk-averse middle class investors. How does fixed deposit work? Let’s take a look.
How does a fixed deposit account work?
For that we have to understand that there are two parties involved here. One is the bank and the other is the customer. Banks need money, which they lend to borrowers from whom they charge interest. Banks obtain that money from its customers mainly through various accounts – current, savings etc.
One way of obtaining that money is through fixed deposits for which they offer certain rates of interest. The funds that they get is lent to borrowers for a slightly higher rate of interest. The difference between the interest rate on FDs and on loans is called the spread, which is the bank’s earnings.
How does fixed deposit work in India? If you have some spare cash and want to invest in fixed deposits, there are many options available for you. You can deposit money for periods ranging from a few days to a few years. Of course, the interest rates for shorter periods will be lower than those offered on fixed deposits of longer maturities. For example, if you want an FD for 30 days, the interest rate could be around 6 percent. If the deposit is for a year, the interest rate could be 7 percent.
The interest rates charged by different banks vary, so you might have to do a comparison to find the best rate. However, differences tend to be small. Smaller banks, like cooperative banks, may offer higher rates of interest than the large banks. However, you must remember that there is a direct correlation between risk and returns. High interest rates will always mean a higher level of risk.
Whether or not you choose to invest in a fixed deposit depends on how much returns you are satisfied with, and the amount of risk you are prepared to bear. Generally, returns on fixed deposits are lower than other investment avenues like equity, but the risks too are lower.
Advantages of fixed deposits
Hedge against inflation
Remember, the real value of your capital is being constantly eroded by inflation. If you have Rs 1 lakh and the inflation rate is 5 percent, the value of that Rs 1 lakh will become Rs 95,000 the next year. So depositing that cash in a fixed deposit will preserve the value of that cash.
Less risk
Fixed deposits are less risky than other investment avenues like equity. Moreover the Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the Reserve Bank of India, insures FDs up to Rs 1 lakh (principal and interest), so your money is perfectly safe up to Rs 1 lakh.
Assured returns
Interest rates are fixed beforehand, so you don’t have to worry about what you’ll get when the FD matures
Now that we have explained what is a fixed deposit and how does it work, you can go ahead and open one. The process is straightforward and simple. If you have a savings account with your bank, you can open an FD with just a few clicks of your mouse. You can open an FD in other banks as well, but you have to open a savings account first. FDs are a good investment, and should be part of any investor’s portfolio.

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