Chapter 2 : Investing in Fixed Deposits

Topics covered in this snack-sized chapter:



Investment in Fixed Deposits arrow_upward


  • The term “Fixed Deposit” refers to a saving account or certificate of deposit that pays a fixed rate of interest until a given maturity date.
  • It is a deposit held by a bank or financial institution for a fixed period of time.
  • In exchange, banks pay the depositors a much larger amount of interest compared to unfixed deposits.
  • In this kind of investment the depositor can’t withdraw the amount before the agreed upon period of time, or at least not without significant fees and penalties. 

    • Steps in Fixed Deposit Investment arrow_upward


  • Split fixed deposits
    • The first step which should be taken by a depositor is to split the fixed deposit and invest it in different banks in order to avoid TDS.
    • A variety of mechanisms are used to collect taxes.
    • One process is tax deducted and collected at the source.
    • This method is used in many countries, including the United States, which deducts income tax at the source.
  • Plan the tenure
    • The second important step is to plan the number of years to keep deposits in order to avoid any penalties.
    • Banks charge penalties if a deposit is withdrawn before the agreed upon time.
  • Appoint a nominee
    • Appointment of a nominee is must in fixed deposit scheme by the depositor in order to avoid hassle free release of amount after depositors.
  • Compound interest policies
    • One of the most important steps in a fixed deposit scheme is to establish if the interest will be compounded quarterly, bi-annually or annually.
    • If the interest is compounded quarterly, then the return rate of interest can potentially be higher than the actual rate.
  • Awareness about tax benefits
    • An investor should be aware about the tax benefits that can be achieved from the fixed deposit scheme.

    Certificate of deposit (CD) arrow_upward


  • This is a specialized deposit you make at a bank or other financial institution.
    • The interest rate on CDs is usually about the same as that of short- or intermediate-term bonds, depending on the duration of the CD.
    • Interest is paid at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest payments.
    • CDs through banks are usually insured up to $100,000.

    Benefits arrow_upward


  • Safety
    • Deposits in reputed banks or institutions are considered one of the safest investment methods as these banks are regulated by Federal Reserve System of America.
  • Regular income
    • A depositor can get regular income in the form of a fixed interest rate for the entire tenure of his deposit.
    • These benefits of fixed deposit schemes make them more popular than other schemes.
  • Saves tax
    • Fixed deposit schemes save on taxes and give high returns on invested money.

    Drawbacks arrow_upward


  • Lower rate of return
    • Money invested in the stock market may give higher returns than that invested in fixed deposits.
    • Money grows slowly in the case of fixed deposits relative to the stock market.
  • Rising inflation can affect the interest benefits
    • The actual benefits or income from fixed deposits can be mitigated by a rising inflation.


    Thank You from Kimavi arrow_upward


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