How Does a Fixed Deposit Account Work?

Date: 22nd January 2025 | Read time: 2 Minutes

A Fixed Deposit (FD) is an easy and safe investment in which you can grow your savings at a fixed interest rate for a stipulated tenure. This is one of the most preferred and safest financial products with assured returns, minus any market risk. Here's a quick guide on how a Fixed Deposit account works:

A Fixed Deposit is an investment whereby you place a sum of money with a bank or financial institution for a specified time. In return, the bank agrees to give you an agreed-upon rate of interest on that amount for the period. Once it matures, you receive the amount you had placed (called principal) as well as interest generated during that time.

• Fixed Tenure: The tenure of an FD varies from as low as 7 days to as high as 10 years. You decide which period suits your goal.
• Guaranteed Returns: With an FD, you receive interest that has been fixed in advance at the time of deposit. This gives you a definite return over the specified time.
• Interest Payout Options: You have various options when it comes to the interest payout:
• Monthly, Quarterly, or Annually: Depending on your financial needs, you can receive interest payouts on a regular basis.
• Cumulative Option: You can opt to have the interest compounded and paid at maturity, along with the principal amount.

• Initial Investment: To open an FD, you need to deposit a one-time amount in the bank. The minimum deposit requirement can vary, but it starts as low as ₹1,000.
• Interest Rate: The interest rate on your FD is fixed at the time of opening the account. The rate remains the same throughout the tenure, and the market fluctuations have no effect.
• Maturity: Once the FD matures, you will receive your principal along with the accrued interest. If you have opted for a monthly or quarterly payout, you will receive the interest periodically, and the principal will be returned to you at maturity.

Different types of Fixed Deposits cater to varied financial needs:

• Regular Fixed Deposit: This is the most common type of FD offering attractive interest rates and flexible tenure options.
• 5-Year Tax-Saving FD: This FD helps you save on taxes under Section 80C of the Income Tax Act. The tenure for this FD is 5 years, and you can invest up to ₹1.5 lakh per financial year.
• Sweep-In Facility: Under this facility, you can attach your FD with a savings or current account. Thus, it ensures automatic transfer from your FD if there is an inadequacy in the balance of your account.

While FDs are to be held till maturity, you can withdraw your deposit at any time if necessary. However, a penalty in the form of reduced interest rates is usually charged in case of premature withdrawal. This means that you will not receive the same rate of interest as was agreed upon initially.

Opening a Fixed Deposit is simple and can be done either online or offline:

• Online: You can open an FD via your bank’s mobile app or website. Some banks, like AU Small Finance Bank, also offer a convenient Video KYC process to open an FD online without visiting a branch.
• Offline: You can physically walk to the nearest branch of your bank, carrying the documents you have as KYC: PAN and Aadhaar. You'll fill up all the forms, and an FD would be ready.

FD is most suitable for:

• Risk adverse individuals seeking a certain return without any kind of market risk
• Seniors who desire earning higher returns on their savings
• Tax savers to save the amount of taxes in their account using Tax Saving FD.
• First-time investors, who wish to start with a safe investment option.

A Fixed Deposit is a simple, secure, and reliable investment product that provides a guaranteed return on investment over a fixed period. For both short-term and long-term savings needs, an FD could be a fantastic way to ensure money grows steadily without worries about market fluctuations. With different types of fixed deposits available, including tax saving options and other features such as sweep-in facilities, it's easy to tailor an FD to meet specific financial needs.

Start investing in a Fixed Deposit at AU Small Finance Bank today to secure your future with high interest and peace of mind.