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A fixed deposit (FD) is an investment avenue through which investors deposit a certain sum for a specified period of time. The financial institution or the bank agrees to pay interest on the invested amount at the end of the specified period.
This instrument has been a favorite avenue for people looking to increase their savings. However, newer options like equities, mutual funds, and real estate have gained more popularity, especially among younger investors because there is a greater possibility of earning higher returns. Nonetheless, FDs remain popular as an investment avenue for many individuals.
Features of FDs
- Safe investments and regulated by the Reserve Bank of India
- Higher interest rates in comparison to savings bank accounts
- Money can be invested only once and remains locked-in for the specified duration
- Premature withdrawal from the FDs entails a penalty
- Interest rates vary from one institution to another
- Senior investors can enjoy higher fixed deposit interest rates
- Interest income on fixed deposits is taxable if the amount exceeds the exemption limit
- Investors can make higher returns if the interest is reinvested
Why Invest in FDs?
Many investors choose to invest in FDs to save their income tax liabilities. The interest on the FDs can be beneficial in saving a significant amount as taxes, as per the Income Tax Act. Investors are advised to calculate their returns, based on their income tax slab in order to better plan their finances.
The returns, made from the compounding effect of these deposits, provide more benefits to investors. Moreover, individuals know the exact amount they will receive on maturity, which is an excellent way to plan their finances. It is advisable to use this instrument to meet certain financial goals that have a fixed date.
Financial institutions provide secured credit cards, loans, and top-up facilities on existing loans against your FDs. When these credit facilities are used in a prudent and efficient manner, they can help investors significantly improve their credit scores. This proves to be even more beneficial in the long run.
Meet financial emergencies
Several institutions allow investors to partially withdraw the amount from their FD accounts for a certain fee. Individuals can also prematurely take out the FD amounts. This flexibility ensures that investors do not have to feel stressed in case certain emergencies arise.
Investors can be assured of receiving their entire investments based on the fixed deposit rates on maturity, irrespective of economic or other circumstances. The returns do not depend on market fluctuations and are not affected by the downward movement of interest rates. Therefore, FDs are a safe and secure investment vehicle, especially for investors who are nearing their retirement ages.
Documents Needed for Opening an FD
These deposits can be opened by individual, business, or institutional investors. Most service providers require identity proof along with address proof, when opening an FD. Some of the acceptable documents include PAN card, voter ID, utility bills, driving license, and passport.
FDs offer a convenient and safe investment avenue, where the capital is at no risk and investors can earn decent returns on their investments. There are several institutions that offer different kinds of deposits and it would help to check these out before making a final decision.
Click here to know more about fixed deposit and their interest rates.
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