What is a fixed deposit and how does it work

Fixed deposits (FDs) are a popular investment option for investors looking for a safe and secure way to grow their money. They are easy to open and offer good returns. In an FD, the investors have to put a lump sum in their bank for a fixed period at a predetermined rate of interest. In the end, the investors receive the invested amount and compound interest.

In comparison to other market-led investments where returns fluctuate, the FD offers guaranteed returns that are fixed when you open the account. Investors can also opt for a monthly or quarterly payout of interest. You can also take a loan against it, as FDs are fixed for an agreed tenure. From the flexibility of investment options to the stability of returns, FDs offer a range of benefits for investors, making it a popular choice for those looking to grow their wealth.

How does a fixed deposit work?

A fixed deposit is a type of investment that offers a guaranteed return and more interest than a savings account. It enables you to invest a one-time lump sum payment for a fixed period.

Depending on how long the deposit has been in your bank, interest is received on the total deposit amount. The period of an FD can range from seven days to ten years. You have the option to take early withdrawals from your FD account, but it can lead to a penalty.

You are free to choose how long a fixed deposit lasts. On the date of maturity, the account holder receives credit for the principal amount plus interest. It also gives people a consistent source of income in the form of interest, which they may either reinvest or reclaim.

Here is an example to illustrate how it works:

Suppose you want to invest ₹2 lakh in FD. You choose to create a one-year fixed deposit account with a bank at a 7% annual interest rate. You will receive ₹2 lakh as your principal at the end of the year, along with ₹14,000 in interest.

To calculate your FD returns, you can use the following formula: A = P (1 + r/n)^(n*t). In the formula, A = maturity amount, P = principal amount, r = annual interest rate, n = number of compounding periods per year and t = tenure of the FD (in years).