Your future happiness depends upon what you save today. In order to get the maximum benefits from your investment, there should be an adequate ratio between risky and safe investments. For beginners, experts recommend a higher proportion of what are considered safe investments. You may then decide to progressively venture towards riskier instruments to earn higher rewards.
People save for many reasons. If you plan to buy to buy an apartment, car or reinvest a higher amount, there are ways to fulfill your aspirations with your current income. A relatively short term and safe investment option is a fixed deposit (FD) account.
An FD is simply an account with a bank, from which you usually cannot withdraw money until the maturity of the term. It earns a higher rate of interest than a typical savings bank account because these funds can be reinvested as a sum of many such fixed deposits by the bank.
The time period of maturity varies with different banks from a month to 2 years or more. The longer the period of maturity the higher is the rate of return.
Benefits of a Fixed Deposit Account
- Keeping a fixed deposit account inculcates the habit of saving, since you are forced to save your money for a significant period. There is usually a penalty for withdrawal of principal before the end of the term.
- It is a higher interest earning instrument than a savings account but lesser than stocks and mutual funds. However, it does have the advantage of being a safe and simple investment tool, especially for beginner investors.
- It is a short term investment that offers higher returns, typically between 7 and 10 percent of the principal. This gives you the flexibility of managing your investment better than just letting it rest in a savings account.
- You can increase your effective rate of interest, which is higher than the stated rate of interest. This can be done by choosing to reinvest the interest that you earn back into the deposit. This allows you to earn compound interest on a higher principal in each compounded period.
- Any investment that you make is subject to inflation. Inflation is the decrease in the value of your money over time. This means that you can buy less things with it over time. With fixed deposits you get a better chance of earning interest, as inflation rates are usually kept under the FD interest rate.
- You may be given an overdraft facility by your bank and also have the opportunity to earn reward points, which you can use to buy gifts and redeem vouchers.
Always choose to bank with a large and reputed institution and be wary of fly by night operators who promise high rates of return, unsupportable by the market.