Fixed deposits and the importance of having one
Time deposits or Term deposits are most commonly known as fixed deposits. Apart from mobilising funds from demand deposits like savings and current accounts, banks also resort to fixed deposits to raise funds. Fixed deposit, like the word suggests, have a fixed duration.
How to open a fixed deposit account
Now that we know what a fixed deposit (FD) is, let us see how we can open a fixed deposit account.
Fixed deposit accounts can be opened in the same way a savings account is opened.
One can either go to a branch of the bank and open a fixed deposit account after choosing the tenure or the person can use internet banking to open an account.
Banks these days offer the flexibility of automatically transferring money from the savings account to the fixed deposit account above a threshold limit as prescribed by the customer. It is called auto-sweep facility.
The key variable to choose in a fixed deposit account is the tenure. The interest rate is fixed by the bank.
Fixed deposits can be opened in banks where one does not have an account. However, here the documentation process is long, and one will need to provide all the details needed in a Know-Your-Customer (KYC) documentation.
There is no restriction in the number of fixed deposit accounts one can open.
Fixed deposits offer better interest rates as compared to a savings account but do not offer the customer the flexibility of withdrawing money as and when they want.
Duration of fixed deposits can vary from a few days to longer-term deposits which can go on for years. Interest changes with time. Higher the time period for which the money will be locked in higher will be the interest rates.
For example, a deposit for 7 days is generally given an interest of 3.5 per cent annualised while that for a year maybe around 6.5 per cent. The shorter period deposits will be more aligned to the savings deposits while the longer term deposits will be aligned to the bond market rates. The maximum period for which fixed deposits are offered is 10 years.
Banks offer higher interest rates for Fixed deposits to compensate for liquidity. Also, they seek longer-term deposits in order to lend the money to projects which have a long gestation period.
The longer-term deposits are more aligned to the bond markets where they compete with corporate and Non-Banking Finance Companies (NBFCs) for money.
Fixed deposits in the form of bonds or debentures are offered by corporate and NBFCs. Bond markets are increasingly getting a popular source of funds for corporate also as they do not have to go through the lengthy process of raising money through the banking system.
Mutual funds, especially the debt funds invest the money raised through the public in bonds. Thus fixed deposit rates of the banks have to be attractive enough to prevent depositors from running to mutual funds or the bonds offered by NBFCs.
In order to make the deal more attractive banks have over the years started offering frills with a Fixed Deposits account such as overdraft facility, zero cost credit cards, nomination facility, safe deposit lockers, internet banking among others.
Fixed Deposits earn higher interest than a Savings Account because the former gives them leg room to lend to people who need the money for roughly the same time limit. A one-year fixed deposit in a bank can allow the bank to lend money to a person who requires a personal loan for one-year period.