Fixed deposits (FDs) are a safe, predictable option for conservative or first-time investors. Several types of FDs cater to different needs, be it regular income, tax savings, or liquidity. From cumulative to corporate FDs, each serves a specific purpose. Understanding them can help you choose wisely and meet your financial goals.
Cumulative vs Non-Cumulative FDs
A cumulative FD pays interest at maturity. The interest is reinvested, allowing it to earn further interest and thus benefit from compounding. A non-cumulative FD, by contrast, pays interest at regular intervals—monthly, quarterly, or annually.
Cumulative FDs are ideal for long-term savers who don’t require a regular income. Non-cumulative FDs suit those who want a fixed income stream. For instance, a cumulative FD could help fund future expenses such as a wedding or home purchase. If you are retiring or require a steady income, a non-cumulative FD may be more appropriate.
Tax-Saving FDs
Tax-saving FDs allow investors to claim deductions of up to Rs 1.5 lakh under Sec 80C of the Income Tax Act. However, these deposits come with a five-year lock-in period, and premature withdrawals are not permitted. They are particularly suitable for salaried individuals with predictable savings patterns. For example, an investment of Rs 1.5 lakh at 6.5 per cent interest would grow to Rs 2.07 lakh after five years. While the principal qualifies for tax deductions, the interest earned is taxable. Loans cannot be availed against these FDs. Joint holding is permitted, but only if the primary holder is the one claiming the tax benefit.
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Senior Citizen FDs
These FDs offer an additional 0.25 per cent to 0.75 per cent interest to senior citizens. Blending safety and income, they can be cumulative or non-cumulative. For example, a five-year senior citizen FD at 7.5 per cent interest on Rs 5 lakh will grow to Rs 7.19 lakh in the cumulative option. That’s Rs 30,000 more than a standard FD at 7 per cent. Some banks also launch special, limited-period senior citizen FD schemes with even higher rates, making them attractive for retirees seeking stability and better returns.
Flexi FDs
Flexi FDs, also known as sweep-in FDs, combine the flexibility of a savings account with the higher returns of a fixed deposit. When your savings account balance exceeds a pre-set threshold, the surplus is automatically transferred to a linked FD. You can withdraw funds when needed without breaking the entire deposit. For instance, if your threshold is Rs 50,000 and your balance reaches Rs 80,000, the excess Rs 30,000 will be moved into a Flexi FD. This product works well for salaried individuals who wish to earn more on idle cash while maintaining liquidity for emergencies.
Corporate FDs
Corporate FDs, issued by companies, generally offer higher interest rates, typically in the 8–9 per cent range. However, unlike bank FDs, they are not covered by deposit insurance. It is therefore crucial to check the credit rating of the institution before investing. For example, a Rs 1 lakh FD for three years at 8.5 per cent would yield Rs 1.28 lakh, compared to Rs 1.21 lakh from a bank FD at 6.5 per cent. That’s a gain of Rs 7,000, but it comes with higher risk. To manage this risk, limit your exposure to corporate FDs to a small portion of your total FD portfolio and invest only in well-rated issuers.
Choose fixed deposits based on your financial goals, need for liquidity, and appetite for risk. Balance safety with returns, understand the terms clearly, and always read the fine print before committing your funds.
(The author is the Associate Vice President, Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)