What is FD ?

Fixed deposit also popularly know as FD is the safest investment option with fixed returns.  Fixed deposit account is an investment account in which money is deposited for a fixed period of time and a fixed interest rate is paid at the end of that period.

It is the safest investment option when compared to other investment types e.g. shares. Opening a fixed deposit account is very easy, you have to do just deposit the money into the account for a given period of time.

Listed below are the benefits of the FD:

1. You can save tax : The investments in fixed deposits up to a maximum of Rs.100,000 for 5 years are eligible for tax deductions under section 80 C of income tax act. Fixed deposits save tax and give high returns on invested money.

2. FD's are Safe : The FD's of reputed banks and financial institutions are regulated by RBI (Reserve Bank of India) the banking regulator in India are very secure and considered as one of the safest investment methods.

3. It can work as a regular income : Fixed deposits earn fixed interest rates for their entire tenure, which is usually compounded quarterly. For those who want an income on a regular basis can invest into FD and use the interest rate as their income. This makes a fixed deposit very popular way of investing money for retirees.

4. Higher interest rate than savings account : Investing in a fixed deposit account earns you a higher interest rate than depositing your money in a savings account.

5. You can have multiple fixed deposits : You can create more than one fixed deposit account in the same bank account, if you want to save for different goals.

Apart from the benefits, there are also some drawbacks of investing in FD

1. The interest benefits can be wiped out with the rising inflation: The actual benefits or income from FD can be annualized by a rising inflation. Suppose the inflation which is currently at 4 % rises to about 8%, your fixed deposit at 10% annual return will effectively yield only(10%-8%) = 2% of return. This return would have been (10% -4%) = 6% if the rate of inflation had not changed. This can drastically eat into your fixed deposit income.

2. Lower Interest Rates : While the money invested in stock markets can give you a return of 20% the fixed deposits will give only about 10%. So, the money grows slowly in the case of fixed deposits.

3. FD maturity amount is applicable to Taxes: The interest earned on FD is fully taxable and is added to the annual income of the individual. Gains from stocks are considered capital gains while dividends are tax free.