Fixed Deposits are one of the best investment avenues for those looking for an assured return. A Fixed Deposit is a type of an account opened with a bank where an assured rate of interest is paid for keeping the funds for a particular period. Fixed Deposits are an easy way to earn returns from funds that are lying idle.
But, how does Fixed Deposit work and why does the bank pay a higher rate of interest on these deposits? This handy guide will help you understand.
How do 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. Savings Bank Accounts earn interest but have restrictions on number of withdrawals and amount of withdrawals. Current Accounts provide liquidity at all times and have no restrictions on the account and fund usage. Hence, they do not command any interest payment. Along with Savings and Current Accounts, banks encourage people to invest in Fixed Deposits and Recurring Deposits by providing a higher rate of interest. 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 have a wide range of loans that they offer customers such as Home Loans, Business Loans, Personal Loans, Car Loans etc. They charge interest to the people who avail such loans.
The difference between the interest that the bank earns on loans and what it pays out on deposits is the income of the bank.
Now that we understand how a bank works, let us examine how Fixed Deposit works.
How does Fixed Deposit work?
Banks provide Savings Account and Current Account facility, but the depositors of these accounts can withdraw their money at any point of time. 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 sum of money is blocked for the period of the deposit. Banks allow depositors the flexibility to invest their funds from periods as low as 7 days 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 facility but premature withdrawal comes with a lower interest rate. On the date of maturity, the bank credits the principal and interest to the bank account of the depositor. Therefore, you must know the type of investment and understand its offerings before making a decision. You can also calculate the amount to be invested and the interest you will earn, using the FD calculator that will help you make a firm decision.
Since the interest rate and the period of this deposit are fixed, banks refer to this type of deposit as a Fixed Deposit. Fixed Deposits offer a flexible time period for which they can be opened, which means the depositor can open it for as long as they have idle funds.
Now that you understand how a Fixed Deposit works, go ahead and open your very own Fixed Deposit today!
You can start your Fix
For existing customers of HDFC Bank, opening a Fixed Deposit via your phone number is easy. Just enter the OTP and choose the tenure and the amount for which you want to open the Fixed Deposit. You can alternatively also continue to login via NetBanking and setup your Fixed Deposit via your Savings Account.
For new customers to HDFC Bank, your can open a Savings Account first and then open your Fixed Deposit after.