How does Fixed Deposits Account Work?
28 December, 2022
Fixed Deposits are one of the best savings instruments for those looking for assured returns on deposits. A Fixed Deposit is an account opened with a bank wherein, the bank pays a guaranteed interest rate on the sums deposited in a Fixed Deposit account, for a stipulated period or tenure. Creating a Fixed Deposit allows you to higher earn returns on funds lying idle in your Savings Account.
But how does a Fixed Deposit work, and why do banks pay a higher interest rate on these deposits? This handy guide will help you understand.
Before jumping into how Fixed Deposits function, one needs to understand how banks operate.
Banks operate two different verticals, borrowing and lending. A bank provides a safe house for individuals and companies to park their funds. In return for people placing their funds with banks, it pays them interest, depending on the account type. Savings Bank Accounts earn interest but have restrictions on the number of withdrawals and amount of the withdrawals. Current Accounts always provide liquidity and have no limits on the account and fund usage. Hence, they do not command any interest payment.
Along with Savings and Current Accounts, banks encourage people to create Fixed Deposits and Recurring Deposits by providing a higher interest rate. This brings in funds for the bank. Technically, the bank is ‘borrowing’ funds from you.
With the funds that the bank accumulates through different accounts, it conducts lending operations. Most banks offer customers a wide range of loans, such as Home Loans, Business Loans, Personal Loans, Car Loans etc. They charge interest from the people who avail of such loans.
The difference between the interest the bank earns on loans and what it pays out on deposits is the bank's income.
Now that we understand how a bank works let us examine how Fixed Deposit works.
How does a Fixed Deposit work?
Banks provide Savings Account and Current Account facilities, but the depositors of these accounts can withdraw their money at any point. Current Accounts have zero balance requirements and the amount in those accounts cannot be estimated. Banks require a constant amount of funds to give out as loans. And the best way for them to raise these funds is by offering Fixed Deposits.
In a Fixed Deposit, the bank blocks the sum of money or the deposit amount for the deposit period. Banks allow depositors the flexibility to create fixed deposits for tenures as low as seven days up to 10 years. The interest rate on the deposit depends on the period for which the funds are placed with the bank. The depositor is not allowed to withdraw the money before the due date. Some banks offer premature withdrawal facilities, but premature withdrawal comes with a lower interest rate. On the maturity date, the bank credits the principal and interest to the depositor's bank account. Thus, if you choose to create an FD, you should know the interest, tenure, and other vital terms of the offering before locking away your funds for a stipulated period.-. You can also calculate the FD amount and the interest you will earn, using the FD calculator to help you make an informed decision.
Since the interest rate and the deposit period are fixed, banks refer to this type of deposit as a Fixed Deposit. Fixed Deposits offer a flexible period for which they can be opened, which means the depositor can open them for as long as they have idle funds.
Now that you understand how a Fixed Deposit works, go ahead and open your own Fixed Deposit with HDFC Bank today!
You can create your Fixed Deposit Asset today with an HDFC Bank Savings Account. New customers can create a Fixed Deposit by opening a new Savings Account. Existing HDFC Bank customers can create their Fixed Deposit by clicking here
*Terms and Conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.