A Fixed Deposit (FD) is a financial instrument provided by banks and NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account.
Fixed deposits offer two types of interest calculations:
The formula for calculating maturity amount is:
For Simple Interest: A = P + (P × r × t)
For Compound Interest: A = P(1 + r)^t
Where:
Comparison of Simple vs Compound Interest over time (₹1,00,000 at 6% p.a.)
Investor deposits a lump sum amount for a fixed period with predetermined interest rate
Bank provides Fixed Deposit Receipt (FDR) with details of maturity date and interest rate
Interest accrues on the deposit according to the chosen interest payout frequency
On maturity, principal plus interest is returned or reinvested as per instructions
The standard fixed deposit where the principal and interest are paid at maturity.
Interest is compounded and paid at maturity along with the principal amount.
Interest is paid out periodically (monthly, quarterly, etc.) instead of at maturity.
These FDs offer tax benefits under Section 80C of the Income Tax Act.
Offers higher interest rates to senior citizens (usually 0.25% to 0.5% extra).
Banks often launch special FD schemes with higher interest rates for limited periods.
| Feature | Fixed Deposit | Recurring Deposit | Debt Mutual Funds | Public Provident Fund |
|---|---|---|---|---|
| Returns | 5% - 7% p.a. | 5% - 6.5% p.a. | 7% - 9% p.a. (potential) | 7.1% p.a. (current) |
| Investment Type | Lump sum | Regular monthly | Lump sum or SIP | Yearly (flexible) |
| Risk Level | Very Low (Guaranteed returns) | Very Low (Guaranteed returns) | Low to Moderate | Very Low (Govt. backed) |
| Liquidity | Moderate (Premature withdrawal with penalty) | Low (Premature withdrawal with penalty) | High (Can redeem anytime) | Low (Partial withdrawal after 7 years) |
| Tax Benefits | Only for Tax-Saver FD (80C) | None | LTCG with indexation benefit | EEE (Fully tax-exempt) |
| Tenure Options | 7 days to 10 years | 6 months to 10 years | No fixed tenure | 15 years (extendable) |
Comparison of potential returns across different investment options over 5 years (₹1,00,000 investment)
Risk vs Return profile of various investment options
Instead of putting all your money in one FD, distribute it across multiple FDs with different maturity dates. This provides liquidity at regular intervals and helps average out interest rate fluctuations.
Different banks offer different interest rates. Small finance banks and some private banks often provide higher interest rates than public sector banks. Always compare before investing.
If you don't need regular income, opt for cumulative FDs where interest is compounded, leading to higher returns at maturity compared to simple interest FDs.
Banks periodically offer special FD schemes with higher interest rates for specific tenures. Keep an eye out for these limited-period offers.