Types of Fixed Deposit: How to Choose the Right FD

A Fixed Deposit (FD) is a financial instrument banks and NBFCs provide that offers stable returns over a predefined period. It is one of the most popular investment options for Indians looking for safe and secured returns.

When you invest in a fixed deposit, you agree to lock in your money with the financial institution for a specific tenure, ranging from 7 days to 10 years. In return, the financial institution offers you a higher interest rate than regular savings accounts. At maturity, you return your principal amount and the accumulated interest.

While fixed deposits offer stable returns, not all FDs are the same. Several types of fixed deposits are available in India, each with its features, interest rates, and terms and conditions. Choosing the right FD account is crucial to maximising your returns.

The following lists the major types of fixed deposits financial institutions offer and how to select the appropriate one for your financial needs.

1. Regular Fixed Deposits

Regular or traditional FDs are the most common type of fixed deposit offered by all financial institutions. They have a predefined tenure ranging from 7 days to 10 years. The key features are:

• Flexible tenure and investment options
• Stable returns and security of capital
• Higher interest rates compared to savings accounts
• Option for periodic interest payouts or cumulative interest
• Loans against FDs are available as per RBI regulations

Traditional FDs are ideal for investors who want stable returns without much risk. The interest rates are usually slightly lower than other types of FDs. You can choose to reinvest the periodic interest payouts to earn compound interest.

2. Fixed Deposits for Senior Citizens

Banks and NBFCs usually offer senior citizens higher interest rates on FDs than the normal rates. The key features are:

• Offered to depositors above 60 years of age
• 25% to 0.75% higher interest rates
• Additional benefits like higher premature withdrawal limits
• Special FD schemes for senior citizens

The higher interest earnings help senior citizens get better returns and supplement their retirement income.

3. Sweep-in Fixed Deposits

Sweep-in FDs allow you to automatically transfer excess funds from your savings or current account to a linked FD account. Whenever your account balance exceeds a pre-set limit, the surplus gets deposited into an FD to earn higher interest. The key features are:

• Link your savings/current account with an FD
• Set a threshold balance limit
• Surplus above the limit automatically sweeps into the FD
• Flexibility to withdraw from the FD anytime

Sweep-in FDs help you earn higher returns on idle funds in your savings or current account. They also offer liquidity, as you can withdraw from the FD when required by simply transferring back to your linked account.

4. Corporate Fixed Deposits

Corporate FDs are fixed deposits offered by Non-Banking Financial Companies (NBFCs) that offer higher interest rates than bank FDs. The key aspects are:

• Offered by NBFCs and manufacturing companies
• Higher interest rates than bank FDs
• Tenures from 12 months to 72 months
• The minimum deposit amount can be as low as ₹5,000

While corporate FDs offer higher yields but carry higher risk than bank FDs. Hence, always check the company's financial health and credit rating before investing.

5. Liquid or Flexi Fixed Deposits

Liquid FDs offer premature and partial withdrawal flexibility while providing higher returns than savings accounts. Key aspects are:

• Flexible premature and partial withdrawals
• Lower penalty on early withdrawals
• Higher interest rate than savings accounts
• Short-term tenure options (15 months to 3 years)

Liquid FDs are suitable for investors who want fixed deposit returns but also need occasional access to funds in emergencies. An early withdrawal penalty of 0.5-1% is charged.

How to Choose the Right Fixed Deposit

Here are a few important factors to consider when choosing a fixed deposit account:

• Interest Rates: Compare FD rates across banks and NBFCs. Based on your deposit amount and tenure, choose the highest rate.
• Tenure: Select the tenure based on your financial goals and liquidity needs. Longer tenures get better rates.
• Minimum Balance: Ensure you have the minimum amount required to open the FD account.
• Premature Withdrawal Rules: Understand the premature withdrawal rules and penalties applicable for early withdrawals.
• Interest Payouts: Choose between cumulative and non-cumulative FD depending on your cash flow needs.
• Credibility: For corporate FDs, evaluate the company’s financial stability and creditworthiness.
• Online/Offline: Online FDs can be instantly opened through net banking. Offline FDs require physical documentation.
• Loan Against FD: If you need funds, check if the bank offers a loan against the FD facility.

Following these tips helps you select an FD that fits your financial goals.

Conclusion

Choosing the right fixed deposit (FD) is essential for maximizing returns while ensuring financial security. With various types of FDs available, including regular, senior citizen, sweep-in, corporate, and liquid FDs, each offers unique benefits tailored to different needs. When selecting an FD, consider factors such as interest rates, tenure, and withdrawal rules. Understanding these elements can help align your investment with your financial goals. Ultimately, fixed deposits remain a reliable investment option for those seeking stable returns with minimal risk, making them a cornerstone of prudent financial planning.

Shriram Unnati FD offers a balance of security, returns, and flexibility. Its competitive interest rates and convenient features make it a standout choice for those seeking a reliable and profitable investment.