A fixed deposit (FD) is a popular way to invest spare funds for a fixed tenure and earn interest. It assures depositors about the returns and the safety of the investment amount. Individuals prefer to park their funds in a bank FD as these are least affected by market volatility.
With the fourth consecutive hike in the Repo Rate by the RBI (Reserve Bank of India) and the MPC (Monetary Policy Committee), many banks have increased their deposit rates. Leading banks can offer you as high as a 7.25% interest rate, making FDs more enticing.
Driving Factors of FD Interest Rates
FD interest rate is a function of many factors. Let us elaborate on the primary factors you should consider before opening an FD account.
- Deposit Amount
A higher deposit amount in your FD account will earn a higher return. Depending on the FD issuer, it can go up to crores. With a higher principal amount invested for a long tenure, banks can offer you significantly high-interest rates.
You can increase your FD interest rate and ensure the safety of your capital in a bank FD. You can use a ready-to-use online calculator for fixed deposits to estimate interest and maturity amounts before opening your FD account. Click here to know how to calculate interest
- The Lock-in Period
When you invest in an FD, you need to choose a period to retain your funds in an FD account, called the lock-in period or maturity. FDs are flexible in terms of tenure. The FD interest rate varies for different tenures. The FD rates increase/decrease as per your selection for maturity periods.
Individuals usually prefer to include long-term FDs in their investment portfolio if their investment horizon allows. Money deposited in an FD account for a longer term can offer a higher rate of returns. The lock-in period can be between 7 days to 20 years with banks. If you open an online fixed deposit, the maximum tenure limit is 10 years.
- The FD Type
There are five types of FDs that a bank can offer. These are – Flexi Sure Fixed Deposits, Regular Fixed Deposits, Tax Savings Fixed Deposits, Senior Citizen Fixed Deposits and Super Senior Citizen Fixed Deposits. The interest rate will vary for different types of FDs. For example, senior citizen FDs provided higher returns with an additional interest rate of 0.50% with the renowned bank. This additional interest rate is 0.75% for super senior citizen FDs.
Secondly, most FDs can be opened with reinvesting or periodic payout options to meet your financial goals or needs. The interest amount will vary for both types of FD.
– Cumulative FD: Cumulative FDs offer compound interest. You will earn interest on interest and receive the accumulated amount (Principal + Interest) at maturity.
– Non-cumulative FD: With a non-cumulative FD, you will receive interest payouts at regular intervals (monthly/quarterly) as per your choice. The rate of interest will depend on the choice of interest payout.
- The Choice of the FD Issuer
Different banks will offer different interest rates on FDs. Therefore, you can compare deposit rates of leading banks and make an informed decision to maximise FD returns.
How to maximise FD returns
- To increase your FD returns, consider a tax-savings FD and avail tax exemptions with Forms 15H or 15G.
- You should avoid premature withdrawal of your FDS. Consider when you will need your money to meet your goals, like your kid’s higher education or wedding, and choose the tenure accordingly to avoid penalty and loss.
- Choose Cumulative FDs that enable you to grow your funds with the benefits of compounding interest rates over the tenure.
- Individuals prefer to follow the laddering strategy to maximise their FD returns in this rising rate trend in the market.
You may also read- How do fixed deposits work
How FD Calculator Can Help to Know Interest Rates
Banks provide an online tool called the calculator for fixed deposits to help individuals calculate their FD returns. It needs a few inputs to calculate your returns in a few seconds.
– Choose the investor’s segment – senior citizen or non-senior citizen.
– Select the Type of FD – Reinvestment/Monthly Payout/Quarterly Payout.
– Input the date of deposit.
– Enter the preferred FD tenure.
– Enter the deposit amount.
The calculator will show you the indicative FD interest rate and amount based on these inputs.
This way, you can make an informed decision while opening an online fixed deposit account, considering all driving factors of FD interest rates and maximizing your returns.