Article

Fixed Deposit
June 07 , 2012

A bank or a company needs funds for operations, while you have excess cash to spare. The fixed deposit (FD) is the oldest and most common way to bring these two needs together. Here, the bank promises you an interest rate, and you promise them a lock-in period. This interest is paid annually, and the principal returned at maturity. So this is also a specific type of debt instrument.

Before putting your money in an FD, you would normally worry whether the borrower would survive long enough to return your money back. With a bank (at least a scheduled bank), you worry less since you know the government will come to its rescue if there is a problem. In case of company FDs, there is plenty to worry. Unless you are really sure about the companys strength and trustworthiness, the higher interest rate may not be worth it. But in most cases, returns on FD will be lower than inflation. This is hence a low risk, lowest return type of instrument.

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