Fixed Deposit: What is no one talking about?

Fixed Deposit: What Is No One Talking About?

Have you ever noticed how everyone seems to be talking about the latest mutual funds or high-risk stocks? While these investment options can offer high returns, they also come with a fair share of risk. But what if there was a way to grow your money safely and steadily without the constant worry of market fluctuations?

Enter the Fixed Deposit (FD), a time-tested and reliable investment option perfect for risk-averse individuals or those saving for specific goals. Consider Shriram Fixed Deposits, which offer competitive interest rates as high as 9.40%* p.a., including an additional 0.50%* p.a. for senior citizens and 0.10%* p.a. for women, making them a great option to grow your money.

How Fixed Deposits Work

You walk into a bank with a certain amount of money, say ₹1 lakh. You decide to put this money in a fixed deposit scheme for a specific period, like a year. The bank agrees to pay you a fixed rate of interest, say 6%* p.a., on that amount for the entire duration. So, at the end of the year, you will get your original ₹1 lakh back, plus the interest earned over the year.

Here’s a breakdown of the key terms:

Principal Amount

This is the initial sum of money you deposit in your FD.

Term/Tenure

This is the fixed period you choose for your FD. It can range from a few months to several years.

Interest Rate

This is the percentage of return you earn on your principal amount. It’s fixed for the entire term.

Maturity Date

This is the date when your FD term ends, and you get your principal amount plus the accumulated interest.

In the simplest terms, you will earn ₹6,000 as interest (₹1,00,000 × 6%* p.a.). Similarly, on the maturity date, the amount you will receive is ₹1,06,000. (Principal + Interest = ₹1,00,000 + ₹6,000)

That, in a nutshell, is how FDs work. It’s a straightforward and secure way to grow your savings.

Power of Compounding in Fixed Deposits

One of the biggest advantages of fixed deposits is the magic of compound interest. Albert Einstein himself called it the ‘eighth wonder of the world’!

The interest on fixed deposits is compounded—annually, quarterly, or monthly. The interest earned is added to your principal amount every year, quarter, or month. The next year's, quarter's, or month's interest is calculated on this higher amount (previous balance + interest). This snowball effect helps your money grow faster over time.

Continuing our previous example, your FD earned ₹6,000 as interest. Let’s suppose the interest is quarterly compounding. Here’s how the interest will be calculated for each quarter:

For the first quarter: ₹100,000 × 6% p.a. × 3/12 = ₹1,500

For the second quarter: ₹101,500 (₹100,000 + ₹1,500) × 6% p.a. × 3/12 = ₹1,523

For the third quarter: ₹103,023 (₹100,000 + ₹1,500 + ₹1,523) × 6% p.a. × 3/12 = ₹1,545

For the fourth quarter: ₹104,568 (₹100,000 + ₹1,500 + ₹1,523 + ₹1,545) × 6% p.a. × 3/12 = ₹1,569

Maturity amount = ₹106,137 (₹100,000 + ₹1,500 + ₹1,523 + ₹1,545 + ₹1,569)

So, the total interest (when it is compounded quarterly) is ₹6,137, which is slightly more than ₹6,000 you earned previously. While it might seem like a small difference initially, the power of compounding becomes significant over longer periods. The higher the frequency of compounding, the higher the interest.

Why Fixed Deposit Is the Safest Investment Plan?

Fixed deposits(FDs) are a popular choice for many Indian investors, and for good reason! Here's why FDs are considered one of the safest investment plans you can choose:

Guaranteed Returns

Unlike stocks or mutual funds, FDs offer a fixed interest rate locked in at the time of deposit. It means, you will know how much your investment will grow over the chosen tenure. This predictability is a major advantage, especially for risk-averse investors.

Liquidity Options

While fixed deposit interest rates are better for longer tenures, many banks offer FDs with flexible liquidity options. You can have interest payouts at regular intervals or reinvest them to benefit from compounding. Some FDs even allow premature withdrawals(sometimes with a penalty), providing access to your funds in emergencies.

Easy to Understand

FDs are one of the simplest investment options available. There's no complex financial jargon or market analysis involved. You deposit your money, choose a tenure, and earn a fixed return. It makes them a great choice for beginners or those who prefer a straightforward investment approach.

FDs are a good option for those seeking to preserve capital, generate a steady income stream, and achieve financial goals.

Things to Consider Before Opening Fixed Deposits

Before you commit your money, here are some key factors to consider:

Interest Rates

Different banks and financial institutions offer varying fixed deposit interest rates. Moreover, Shriram Fixed Deposits deliver an additional 0.50%* p.a. for senior citizens and 0.10%* p.a. for women.

Tenure

FDs come in various tenures, ranging from 7 days to 10 years. Choose a tenure that aligns with your financial goals. Short-term FDs offer lower returns but provide easy access to your money. Long-term FDs offer higher returns but lock in your money for longer.

Premature Withdrawal Penalty

Most FDs levy a penalty if you withdraw your money before maturity. Understand these charges to avoid potential losses.

Interest Payout Options

Decide how you want to receive interest earned on your FD. Options include monthly, quarterly, or cumulative (interest compounded with the principal amount).

Ready to Grow Your Savings?

Fixed deposits might not be the most exciting investment option, but they offer a valuable combination of security, guaranteed returns, and simplicity. They are a great way to grow your savings steadily, especially for those with a lower risk appetite. Shriram Fixed Deposits offers competitive interest rates, a wide range of term options, and a transparent and trustworthy banking experience. With Shriram FDs, you can grow your savings with peace of mind, knowing your money is safe and working for you.

FAQs

1. How does the risk associated with fixed deposits compare to other investment plans?

Fixed deposits are generally considered a low-risk investment compared to stocks, mutual funds, or real estate. With FDs, your principal amount is insured up to a certain limit, and you receive a guaranteed return. Other investments can offer higher returns, but they also carry a higher risk of losing money.

2. What are the key features of fixed deposits that make them a safe investment option?

The main features that make FDs safe is guaranteed returns. Since you lock in your money for a fixed term, there's no fluctuation in value, unlike stocks.

3. Can Shriram fixed deposits provide higher returns compared to other investment plans?

As FDs provide low-risk returns, they generally offer moderate returns, which may be lower than what you could earn with riskier investments like stocks or mutual funds. However, FDs provide a guaranteed return, making them attractive for those prioritising safety over high potential gains.

4. What are the liquidity options available for fixed deposit investors?

While FDs lock in your money for a long time, you can prematurely withdraw your FD. Moreover, with the advent of mobile and internet banking, FDs have become more liquid. Just note that premature withdrawal may incur a penalty fee or a lower interest payout.

5. How does inflation affect the returns from fixed deposits?

Inflation reduces the purchasing power of your money over time. If the FD interest rate is lower than the inflation rate, your money won’t grow realistically. Hence, consider inflation when choosing an FD to ensure your returns, at least keep pace with inflation.