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How Does A Fixed Deposit Work? 

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September 15, 2022
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How Does A Fixed Deposit Work?
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A Fixed Deposit (FD) is an account that you open with a bank or a financial institution. It is similar to a savings account in the sense that you can invest your money in an FD and earn interest on it, just like you would through a regular savings account. However, there are also a few differences between FDs and savings accounts. 

FDs come with deposit and withdrawal rules  over the course of their lifetime – this means that if you don't follow these rules then your money might be locked away for a short period. 

If you are planning to  start a fixed deposit account, it is important that you know how it works.  FDs have been one of the most common and reliable instruments of money saving in India.

Why do FDs offer such high interest rates?

Let’s take a look at some of the things you should be aware of before you start investing your money in fixed deposits:

  • Banks offer Current Account and Savings Account services, however, the holders of these accounts have unlimited access to their funds. There is no minimum balance requirement for current accounts, and it is impossible to determine their level. Banks need a recurring sum of money to distribute as loans. And providing Fixed Deposits is the most effective approach for them to raise this cash.
  • A fixed deposit blocks the amount of money for the duration of the deposit. Banks provide depositors the freedom to invest their money for terms ranging from seven days to ten years. The length of time the money is deposited with the bank determines the interest rate on the deposit. The money cannot be withdrawn by the depositor prior to the payment due date. Some banks provide the option for premature withdrawal, although the FD interest rate is lower. The principal and interest are credited to the depositor's bank account on the day of maturity by the bank. Therefore, before making a choice, you must understand the type of investment and its benefits. Using the FD calculator, you can estimate the amount to invest and the interest you will receive to help you make a definite choice.
  • Banks refer to this sort of deposit as a Fixed Deposit since both the interest rate and the length of the deposit are fixed. Fixed Deposits have a flexible opening term, so the depositor can keep the account open for as long as they have extra money.

How do fixed deposits work?

While starting  an FD, you select an amount and a tenure. The tenure, commonly referred to as a "term," is the duration till which you would want to fix the FD..  The tenure can vary from one month to 10 years, depending upon your necessity and financial goal. 

There is a set interest rate for each tenure. For instance, banks typically list the interest rates for their fixed deposits in a table similar to the one below:

Tenure/TermInterest Rate (% p.a.)
7 - 29 days2.75 %
30 - 90 days3.25 %
91 - 184 days3.75 %
185 days - less than 1 year4.65 %
1-3 years5.00-5.35 %
3 - 5 years5.25-5.35 %
5 - 10 years5.25-5.50 %

Why should you save for short-term goals with Hubble Money?

It can be a bit of a hassle to start  and  withdraw FDs on a whim . Additionally, interest earned on FDs is taxable. If you have short-term goals for lifestyle purchases such as  gadgets, appliances, fashion, jewelry, you can use apps such as Hubble Money. With Hubble Money, you can create short-term savings (with a minimum tenure of 30 days) that are earmarked for specific purchases. If you’ve got any goals in mind, such as getting your hands on the latest iPhone, all you need to do is download the app.

How to create a savings plan on Hubble Money?

To create your plan, you must:

  1. Select the desired partner brand (for instance, Myntra)
  2. Select the applicable savings plan displayed on the homepage (for instance, get 10% extra  on a savings plan) by clicking the Get Started button.
  3. A new page will open.
  4. Select the ‘Customize’ option to change your deposit amount along with tenure.
  5. Review the plan to verify the selected details.
  6. Click on the ‘Pay’ button and complete the payment with  your desired mode (such as UPI).
  7. Your savings plan will be made 

FAQs

Which type of FD is the best?

A tax saving FD is the best option to pick. Do note it has a lock-in period of 5 years.

Can I create an FD for just 3 months?

Yes, the minimum tenure of an FD is 7 days, so a 3 month FD is possible.

Which is better - FD or RD?

The two help investors fulfill different objectives. An FD requires a one-time payment while an RD requires regular savings. The two are good savings plans for investors with low risk profiles.

Komal Chawla

Writer-by-chance and overthinker-by-choice, raging a war against the Pineapple-on-pizza brigade

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