All you want to know about investing in fixed deposits

Ask any youngster these days about investments and they will talk about stocks, mutual funds, unit linked insurance plans, real estate... the list will go on.

Investing money in safe and secure bank fixed deposits (FDs) will figure in the end, if at all. Rakesh, my neighbour, who was all of 19 and into her first job in a trading company is one such example.

She was happy that her first job as a sales assistant was fetching her a cool salary of Rs 14,000 per month and after her expenses she managed to save more than Rs 7,500 every month. She wanted to buy her own house before 30, and after discussing it with her friends, she wanted to invest in all the investment avenues mentioned above but not in fixed deposits.

Why not fixed deposits? Because she didn't know much about this investment opportunity and her friends told her that investing in stocks and mutual funds would get her higher returns. Though investment in stocks and mutual funds would give her superior returns in the long term (that's what the common belief is and history too supports this claim) she wanted her investments to bear her safe and steady returns so that she could use the money saved to chip in with her contribution for buying a house.

Investing a neat sum of money in fixed deposits every year would help her achieve that.

Here are the most commonly asked questions -- and their answers -- about fixed deposits by youngsters like Rakesh

Who is eligible to apply for a fixed deposit account?

Any individual or institution is eligible to apply for the account.

How do I apply for an FD account?

You can get a bank FD at any bank.

You have to open an FD account with the bank to make the deposit. Some banks may also insist that you maintain a savings account with them to operate an FD account.

When you open the FD account, you are issued a deposit receipt or an account statement. This statement can be updated, depending on the duration of the FD and the frequency of interest calculation. Make sure you check deposit receipts carefully to see that all particulars have been properly and accurately filled in.

How will investing in fixed deposits benefit me?

Apart from the fixed rate of return on your FD investment, you can withdraw the FD at any time before maturity without any difficulty. You can avail loans up to 85 percent of the principal, that is, the amount you invested in the FD. You can also avail of a loan with overdraft facility from the bank against the FDs.

Is there a minimum amount that can be deposited into a fixed deposit account?

The minimum deposit amount required for the FD account is Rs 1,000. There is no fixed multiple or upper limit.

Can I redeem my fixed deposits before the original term?

Yes, an FD can be closed before its original term. If the FD is closed before completing the original term of the deposit, the interest will be paid as per the interest rate applicable on the date of deposit, for the period the deposit has remained with the bank.

Some banks may also charge a penal rate of interest as prescribed by the bank on the date of deposit.

Do senior citizens get any extra benefit on the fixed deposits (FD)?

Yes, senior citizens get higher interest rates on their FDs.

Do I have to pay tax deducted at source (TDS) for FDs?

Tax is deducted at source on the interest accrued on FDs as applicable, as per the Income Tax Act, 1961.

What is the range of tenure for which I can open an FD account?

You can deposit money for a period as short 15 days to as long as 10 years.

Now that Rakesh knew how bank fixed deposits work she was happy and ready to invest a lumpsum amount at the end of each year. This she said would help her save a tidy sum of money in the next 11 years which she will use to buy her dream house.

When she joined her first job Rakesh had set herself a target to buy her own dream house before 30. And she was convinced that saving money in a fixed deposit will help her achieve her dream.