New to Fixed Deposits?
Term or Fixed Deposits are so called because your money stays invested for a fixed term or period. For individuals, this can be as little as 15 days, while the upper limit is endless; though, generally, nobody offers tenures in excess of 10 years. It’s really too optimistic to think that far ahead.
Fixed Deposits offer a rate of interest – the benchmark of which is fixed by the Reserve Bank of India, on the basis of which individual banks fix their rates.
Rates of interest will differ for different tenures or periods of deposit. While, generally, lower tenures attract lower rates of interest, this is not the rule.
Tenures themselves vary widely. These could be a specified number of days, months or years. Sometimes, you may even have the option of parking your funds for an odd period of time (to suit a specific need) – of course you may have to compromise on the rate of interest in that case.
Deposits less than six months in tenure offer a simple rate of interest. While those greater than six months are compounded at quarterly rests. So your interest yield (effective rate of interest) is even higher.
Fixed Deposits are considered liquid funds because, although they mature once the stated tenure is complete, they can still be broken any time before that. Prematurely breaking a deposit, however, often attracts a penalty – a lower rate of interest for the period the deposit was maintained.
Companies also offer Fixed Deposits. However most COMPANY DEPOSITS do not have an early redemption clause – they have to be kept invested for the entire tenure. While some Company Deposits may offer a better rate of interest than banks, one has to be careful about safety. That’s why Company Deposits come with ratings indicating the level of safety. Generally, rate of interest appears to be inversely proportional to the safety rating, though this is not always the case. The thumb rule, however, would be to invest in a company you know or trust implicitly.