What is Interest Rate on Fixed Deposit?

With increasing financial awareness, the acceptance of financial products in the country has risen drastically. Fixed deposits have been the investment of choice for many long before financial instruments became common. The safety of capital and reliability of returns offered by fixed deposits have led to its popularity. 

What is a fixed deposit?

Fixed deposit is a financial product offered by banks and non-banking financial institutions wherein deposits are taken from investors on a pre-decided interest rate and for a defined tenure. At the end of the time duration, the investor receives the amount with the accumulated interest. The defining feature of a fixed deposit is the lock-in period, which means the money cannot be withdrawn before a minimum specified period. However, banks and NBFCs generally allow withdrawals after levying a penalty. Fixed deposits are ideal for risk-averse investors who want to earn a higher interest rate than a savings account.

How fixed deposits function?

Fixed deposits are financial instruments that allow you to invest a lump-sum amount with a financial institution to earn interest for a specified period. When you open a fixed deposit account, you lend the money to the financial institution. The lender, on the other hand, lends the money received from you to borrowers at a higher rate. The principal amount is also invested in shares, bonds and mutual funds. The money deposited in savings accounts is also used to lend but earns a lower interest rate due to uncertainty of the duration. Funds in a fixed deposit remained locked for a specific tenure, providing lenders greater level of certainty. The interest paid to the depositor by the lender also depends on the type of the fixed deposit account.

Types of Fixed Deposits

There are two types of fixed deposits—cumulative and non-cumulative. Both serve a different set of customers. The interest on fixed deposits is either paid periodically or at the time of maturity. Deposits in a non-cumulative account pay monthly, quarterly, half-yearly or annual interests. It is ideal for people who need the interest income to meet interim expenses. On the flip side, interest on the cumulative account is left to accumulate and is paid with the principal amount at the time of maturity. The accumulated interest in cumulative account benefits from compounding and multiplies significantly. It is best suited for investors who have a lump-sum amount to invest and do not need the money for day-to-day use. Generally, the interest rates for cumulative and non-cumulative accounts is different. Having a longer tenure, cumulative accounts earn a higher interest.

Interest Rates

Fixed deposits are offered by a variety of banks and NBFCs with different tenures and interest rates. The interest rate can vary between 3.5 percent for a 7-day deposit, to 9 percent for long-duration fixed deposits. NBFCs offer a higher rate of interest than banks. The higher rate justifies the perception of NBFCs being less credible than large banks. It is important to ensure the credit rating of the NBFC before investing. Fixed Deposits on Finserv MARKETS have a stable MAAA and FAAA rating from ICRA and CRISIL, respectively. You can get assured returns at competitive interest rates ranging between 8.28 percent and 8.6 percent. Senior citizens can earn an additional 35 basis point interest over the rate offered to general investors. You can open a fixed deposit account through Finserv MARKETS, which also gives the flexibility to choose from six different tenures. The interest rate on shorter tenure fixed deposits is lower than longer tenure ones. For instance, the interest rate on monthly non-cumulative fixed deposit account available on Finserv MARKETS is 8.28 percent, while on a three-year cumulative account is 8.6 percent. If a senior citizen opens a three-year cumulative account, he/she can earn an interest up to 8.95 percent on the investment.

Factors that can affect fixed deposit rates

The interest rate offered by financial institutions on fixed deposits remains unchanged for the tenure of the deposit. However, the interest rate can change at maturity and if you choose to reinvest or renew your account, it has to be done at the prevailing rates. The interest rate depends on various factors.

  • Tenure

Both the duration of the investment and the amount invested have a bearing on the interest rate of the fixed deposit. Deposits with a longer tenure attract a higher rate of interest as it provides the lender with a higher level of certainty which is passed on to the customers. Fixed Deposit on Finserv MARKETS also offers special interest rates on some cumulative deposits. If you open a fixed deposit account for 15 months with a minimum deposit of Rs 1 lakh, you can earn 8.05 percent on the investment as against 8 percent on a deposit of a lower amount.

  • Renewals

Investors have an option to renew the fixed deposit at the time of maturity. If you choose the auto-renewal facility while booking a fixed deposit account on Finserv MARKETS, you can earn an additional 0.10 percent interest on your investment. It also eliminated the need to keep track of renewal dates.

  • Age

Banks and NBFCs offer a higher rate of interest to senior citizens while investing in fixed deposits. Age plays an important role in determining interest rates. Senior citizens can get an attractive rate of interest in Fixed Deposits.

  • Reserve Bank of India

The central bank of the country is authorised to set the policy rates and control the monetary policy which affects the interest rates of various financial products. The regulations set by the RBI on the lenders control the interest rate offered by financial institutions. For instance, major banks generally decrease the interest rates on fixed deposits when the RBI reduces the repo rate. Fixed deposit interest rates also decrease during times of recession when the central bank increases the money supply in the economy.

  • Inflation

The rate of inflation also has an impact on fixed deposit interest rates. If inflation is high in the country, the real returns from fixed deposits decreases. For example, if a fixed deposit offers a 7 percent interest rate and the inflation is 8 percent, the real returns for the investor will be negative. To counter the effects of high inflation, lenders sometimes offer higher interest rates to attract investors. 

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