What are fixed deposits?

Edited by Ben Lobel
What are fixed deposits

Saving money is important — but making that money grow is even better. Some investors take on risk in the financial markets for the chance of higher returns. Others prefer security. That’s where fixed deposits (FDs) come in. They’re a low-risk investment option that offers predictable returns and peace of mind. Let’s break down what a fixed deposit actually is and how it’s different from a bond.

Deep dive into fixed deposits

A fixed deposit (often just called an FD) is a financial instrument offered by banks. It provides a higher interest rate than a regular savings account, but it locks up your money for a specified period. Think of it as lending your money to a bank for a particular duration. In return, the bank pays you a fixed rate of interest. 

This makes fixed deposits very popular among those who want peace of mind. With this, your money is secure, and you enjoy predictable returns and capital preservation.

Ever wondered what banks do with the money you invest in FDs? They use all this money to lend to companies or other individuals in need of a loan. 

Fixed deposits are a good way to park emergency funds or save for short-to-medium-term goals. They are also used by investors to diversify a risky portfolio.

So, what does investing in a fixed deposit mean? It essentially means that your money is ‘fixed’ or locked in for a specific term, and the interest rate on that money is also ‘fixed’ for that duration. You have the flexibility to choose the amount to deposit and the tenure from the options offered by the bank.

The date on which the fixed deposit ends is called the ‘maturity’ date. This is when you receive your initial money (called principal amount) back, along with the accumulated interest. If you wish to withdraw the money from your fixed deposit before the maturity date, you typically need to pay a fee that is deducted by the bank from the interest payable to you.

Explore the financial markets by creating an account with Capital.com today.

Fixed deposits in India, the UK and the US

While the core concept remains the same, FDs may be structured differently across different countries.

Key characteristics of fixed deposits

Understanding the characteristics of fixed deposits can help you make an informed investment choice.

Fixed deposits vs bonds

While both bonds and FDs involve depositing money for a return, they have distinct differences. To understand this, let’s first clear up a key question: what is a bond?

A bond is a debt security issued by a corporation or government to raise capital. Investors purchase these bonds, and in return, the borrower promises to pay them regular interest payments and repay the principal amount at maturity.

Here’s a comparison of bond vs fixed deposit:

Feature

Fixed Deposit

Bond

Issuer

Banks and financial institutions

Governments, corporations, municipalities

Nature

Deposit product

Debt security (can be traded in secondary markets)

Liquidity

Typically, less liquid with penalties for early withdrawal

Can be liquid; actively traded on exchanges

Risk

Lower risk (insured by deposit insurance)

Varies (government bonds are low risk, corporate bonds carry credit risk)

Return

Fixed interest rate, paid by the bank

Fixed or floating coupon rate, paid by the issuer

Regulation

Regulated by banking authorities

Regulated by securities market authorities

Accessibility

Easily accessible at banks

May require a brokerage account

In short, FDs are simpler, more secure and less liquid. Bonds, particularly corporate bonds, can offer higher returns but carry credit and market risk. Government bonds are generally considered very safe but offer lower yields.

Learn more about what a bond is with Capital.com.

Importance of fixed deposits in the financial markets

Fixed deposits play a significant role in the broader financial ecosystem. Firstly, they serve as a key risk management tool for individuals and financial institutions. They provide a safe haven for capital during periods of high volatility and economic uncertainty. This stability is crucial for overall financial health.

FDs are a primary source of funds for banks. The money deposited in FDs is lent out by banks for various purposes. This lending activity is fundamental to economic growth. 

Exploring trading accounts and demo accounts

There are numerous financial instruments to learn about in addition to FDs. For those interested in exploring the markets, opening a trading account can be useful. This allows you to explore and trade your preferred asset classes, including shares, foreign exchange and commodities.

For newcomers and experienced traders wanting to test new strategies, a demo account is an invaluable tool. It allows you to simulate trading in real market conditions using virtual money, enabling you to learn about the markets and strategies without risking actual capital. While fixed deposits offer predictable returns, trading accounts provide growth opportunities, and a demo account can bridge the gap between understanding and active participation.

Ready to begin your investment journey? Open a demo account today.

FAQs

What is a fixed deposit and how does it work?

A fixed deposit is a savings product offered by banks where you deposit a lump sum for a fixed tenure and earn a fixed interest rate. At maturity, you get your principal plus the accumulated interest.

What are the key characteristics of a fixed deposit?

Key characteristics include guaranteed returns, security (often insured by government schemes) and a fixed tenure and interest rate. Early withdrawals may attract penalties.

How does a fixed deposit compare to a bond?

A fixed deposit is a bank product, generally simpler and less risky, while a bond is a tradable debt security issued by governments or corporations, which might carry higher risk but also potentially higher returns.

Can you withdraw a fixed deposit before maturity?

Generally, yes, but usually with a penalty. This penalty often involves a reduction in the interest rate you receive for the period your money was held or a flat fee.

Are fixed deposits risk-free?

While highly secure, no investment is entirely ‘risk-free.’ However, FDs are considered very low risk, especially when placed with reputable, insured banks. The primary risks are inflation eroding purchasing power or potential penalties on premature withdrawal.