Fixed deposits 101 - FDs
In most parts of the world, fixed deposits are the most popular investment instruments.
For many years, investment has been synonymous with FDs because they are considered safe, provide guaranteed returns over time, and have a flexible duration.
You will receive a fixed return regardless of how interest rates move or how the economy performs at the time of investment.
You also earn interest on the amount of investment.
This allows you to easily accumulate a large sum.
What is fixed deposit?
A fixed deposit also known as bond, term deposit or time deposit is a financial saving instrument offered by banks and nonbanking financial companies in which you deposit a lump sum amount and earn a higher rate of interest for a set period of time.
At maturity, you receive both the principal and interest, which you can always reinvest.
It's a great way to grow your money by earning a fixed rate of interest.
What are different types of fixed deposit?
Investing in Fixed deposit one has to know different products offered by the market. here are different example:
* Recurring Deposit
With a recurring deposit account or RD account, monthly deposits are made for a fixed period of time. After the maturity or end of the said period, your account will debited with principal amount and interest acquired through the period.
* Standard Term Deposit
A deposit is made for specific period of time with a predetermined interest to a financial institution such as bank. During this period depositor or investor is not allowed to cancel the contract until maturity. Incase of cancel before maturity or end of stipulated time, depending on the terms of investment, one may loose entire or partial amount of interest acquired.
Example. If you invest X amount for 5 years, half way to year 2 you decide withdraw the X amount invested. Then depending on terms of investment you may walk away with only the X amount or (X + 2 year interest).
* Flexi-Fixed deposit
A Flexi-Fixed deposit is a type of deposit offered by banks in India that combines a demand deposit and a fixed deposit.
Main features of flexi-fixed deposits are:
* Sweep-in / Auto sweep
Any balance in excess of the specified amount is automatically transferred to a fixed deposit account for a one-year term.
Money in excess of a fixed limit can earn a much higher rate of return through this transference.
FDs formed by auto sweep have a one-year interest rate based on the rate on the day of the auto sweep.
The Flexi Fixed deposit scheme is made up of two parts.
A savings and current account, as well as a fixed deposit account.
* Sweep-out/Reverse sweep
This works in reverse where funds are insufficient in the saving account to complete any debit request, the balance in the bank is automatically withdrawn in multiples set by different banks terms.
The remaining balance in the FD will continue to earn higher interest at the original rate applicable to FDs.
If the customer wants to withdraw funds more than what is deposited in his savings account, funds from the fixed deposit are withdrawn by the bank to settle the transaction.
How to calculate fixed Deposit?
Final interest to earned in fixed deposits will depend on amount invested, interest rate offered and duration.
basic formula:
key:
Interest = I
Amount invested = X
interest rates = R%
period = T
I = X * R% * T - This will get the interest of invested amount.
For cumulative FDs - there will be compounded interest for the period of investment.
Example. John invest $5,000 with a bank which offered rates of 10% p.a for a period of 5 years. The total cumulative FD John will get will be calculated as follows:
1st year interest:
$5,000 * 10% * 1 = $500
2nd year interest:
$5,500 * 10% * 1 = $550
3rd year interest:
$6,050 * 10% * 1 = $605
4th year interest:
$6,655 * 10% * 1 = $665.5
5th year interest:
$7320.5 * 10% * 1 = $732.05
At the end of 5 years John's account will be debited with ($5,000 + Interests )- Tax.
For non cumulative FDs - regular payments will be made to John's account in batches of $500 for interest as it will lose the compounding power.
Total net amount to be withdrawn in John's account will depend on taxation as different countries and jurisdictions have different limits. (Consult with your jurisdiction or territorial laws on taxation)
Who should consider Investing
With assurance and guarantee from the financial offer of money back upon maturity of Fd, there a those who would consider investing in Fixed deposit. Who are most appropriate people to invest, the answer is in open anyone. Anyone who:
-Has reached retirement and wishes to ensured steady continuity and stability on income.
-Has short-term goals. If one want to use the amount in the near future and wants to ensure no value is lost on funds in the bank account then this is a better option.
-Has appetite risk low with guarantee of money back at the end of investment.
-Has low amounts to invest. depending on different organizations some will offer as low as $50 to start fixed deposit investment plan.
With fixed deposit being offered in most jurisdiction it may be a great way start your way to investment for financial growth and sustainability.
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