What is a fixed deposit?
Fixed Deposits are a great way to save money and get guaranteed returns. When you open a Fixed Deposit account with a bank, you deposit a certain amount of money for a specific period of time. In return, the bank pays you a fixed interest rate on that money.
But why do banks pay higher interest rates on Fixed Deposits compared to regular savings accounts? To understand this, let's look at how banks operate.
Banks have two main functions: borrowing and lending. They provide a safe place for people and businesses to keep their money. In return, the bank pays them interest, depending on the type of account. Savings accounts earn interest but have limits on withdrawals, while current accounts don't earn interest but offer more flexibility.
In addition to these accounts, banks encourage people to open Fixed Deposit and Recurring Deposit accounts by offering higher interest rates. This helps the bank gather more funds. Essentially, when you open a Fixed Deposit, you're lending money to the bank.
The bank then uses the money it collects from various accounts to lend to others, offering loans like home loans, business loans, and personal loans. They charge interest on these loans.
The difference between the interest the bank earns from loans and what it pays out on deposits is how the bank makes money.
So, when you open a Fixed Deposit, you're essentially lending money to the bank for a fixed period, and in return, you get a guaranteed interest rate.
How does a Fixed Deposit work?
Banks offer both Savings and Current Accounts, but people can take out money from these accounts whenever they want. Current Accounts don't need a minimum balance, and it's hard to predict how much money will be in them.
Banks need a steady amount of money to lend to others. The main way they gather this money is by encouraging people to open Fixed Deposits.
In a Fixed Deposit, you give a certain amount of money to the bank for a specific period. You can choose this period, which can be as short as seven days or as long as 10 years. The interest rate you get depends on how long you keep your money in the bank.
Once you put your money in a Fixed Deposit, you can't take it out until the time is up. Some banks let you take it out early, but then you get less interest.
When the time is up, the bank adds the interest you earned to your account. So, before you decide to open a Fixed Deposit, make sure you know the interest rate, how long you want to keep your money locked away, and any other important details.
You can use an FD calculator to figure out how much money you'll get and how much interest you'll earn.
Since you can't change the interest rate or the time period, banks call this type of deposit a Fixed Deposit. You can open Fixed Deposits for any length of time that suits you as long as you have some extra money to spare.
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