Fixed Deposits are among the most popular forms of savings due to their reliability and risk-free nature. For a risk-averse investor, the importance of an FD as part of their portfolio is always paramount. FDs are also used as an investment tool for retirement planning and other financial goals. However, FD returns depend on various factors, including tenure, bank policies, and economic conditions.
Have you wondered how choosing a tenure can impact the returns on your FD? Does a longer tenure always result in higher Fixed Deposit interest rates or returns? You might be surprised to learn about the impact of tenure on FD returns and how you can use it as an effective investment tool.
Advantages of Fixed Deposits
- Highly secure and low-risk
FDs are generally unaffected by market volatility as the principal amount is protected, and you get a guaranteed return.
- Fixed returns and compounding benefits
Once you have an FD in a bank, the interest rate does not change throughout the predetermined period.
- Liquidity options
There are options for withdrawing FD completely or partially to meet financial emergencies.
Factors affecting FD interest rates
There are a few factors that impact the interest rates on FDs:
- Economic conditions and RBI regulations
When inflation rises, banks may increase FD rates to attract deposits. Similarly, increasing the repo rate often leads banks to offer higher FD interest rates to maintain deposit growth.
- Bank policies
There can be differences between interest rates offered by public and private sector banks based on tenure and the category of investors.
- Type of FDs
Suppose an investor opts for Cumulative FD (where interest accumulates and liquidates at the end of the period). In that case, there is a chance of a higher return than the traditional alternatives.
- Market competition
Banks can offer their customers schemes, attractive interest rates, and packages to remain competitive. However, to select the best scheme for accomplishing your financial goals, use the FD calculator to compare different banks’ offerings and choose a suitable option. The calculator is a digital tool that lets depositors compute the maturity amount at the end of the investment tenure by entering a few values.
These include the amount you have deposited, the deposit type, tenure, start date, and the interest rate.
Impact of tenure on FD interest rates
You must be aware of the impact of tenure on the interest rates and overall returns offered by FDs. Typically, when the investment is for a longer period, the compounding effect kicks in, offering a higher return to the investor. Longer tenures usually offer higher Fixed Deposit interest rates because banks look forward to incentivising longer commitments.
Conclusion
You should understand your financial goals and choose the tenure accordingly. A longer tenure might not automatically result in higher returns. Circumstances, such as the existing economic conditions, promotional offers, and liquidity requirements of banks, are responsible.
