What Are the Benefits of a Fixed Deposit?

A fixed deposit is a financial product offered by banks and financial institutions that allows individuals to deposit a lump sum of money for a predetermined period. This investment earns interest at a fixed rate, which is set at the time of opening the account.

Predictable and Secure Growth

Fixed deposits provide a predictable and secure avenue for capital growth, distinguishing them from more volatile investment options. The interest rate on a fixed deposit is established when the account is opened and remains constant throughout the chosen investment period. This stability ensures that the income earned is not affected by market fluctuations, providing a clear understanding of the returns one can expect.

The principal amount invested in a fixed deposit is generally secure, offering a high degree of capital protection. In the United States, deposits in banks are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.

Fixed deposits commonly offer higher interest rates compared to standard savings accounts. While typical savings accounts might yield very low annual percentage yields, fixed deposits can offer rates ranging from approximately 2.50% to 8.50% per annum, depending on the institution and tenure. This higher yield allows money to grow more effectively over time for funds that are not needed immediately.

Flexible Investment Options

Fixed deposits offer a range of flexible options. Investors can select a deposit period, known as tenure, that aligns with their specific objectives, with terms commonly ranging from as short as seven days to as long as ten years. This flexibility allows for both short-term savings strategies and long-term financial planning.

Regarding interest payouts, fixed deposits typically provide two main choices. A cumulative option allows the interest earned to be compounded and paid out along with the principal at the maturity of the deposit, leading to higher overall returns due to the effect of compounding. Alternatively, a non-cumulative or regular payout option enables investors to receive interest periodically, such as monthly, quarterly, or annually, providing a consistent income stream.

Fixed deposits also offer considerations for liquidity, even though funds are typically locked in for the chosen tenure. Many financial institutions allow individuals to take a loan against their fixed deposit, using it as collateral. This can provide access to funds, often up to 75% to 90% of the deposit value, at interest rates usually 1% to 2% above the fixed deposit rate, without having to prematurely close the account.

While not ideal, premature withdrawal of a fixed deposit is generally possible if funds are urgently needed. However, this usually involves penalties, which can range from 0.5% to 1.0% of the interest rate, and the interest earned may be recalculated at a lower rate for the period the deposit was held. Some institutions may not pay any interest if the withdrawal occurs within a very short period, such as seven days of deposit.

Simplicity and Accessibility

Fixed deposits are known for their straightforward investment process. Opening an account typically requires minimal documentation and follows a clear, uncomplicated procedure at most financial institutions.

Once established, fixed deposits require no active management or continuous monitoring from the investor. This “set it and forget it” characteristic means funds grow automatically according to the agreed-upon terms until maturity.

Fixed deposits are broadly accessible, often requiring a relatively low minimum deposit amount to get started, with some institutions allowing deposits as low as $100 or $5,000. Their simplicity and low entry barriers make them a suitable option for individuals who are just beginning their investment journey or prefer a less complex financial product compared to more intricate market-linked investments.