Understanding the Fixed Deposits from a Teenager's Lens

Are you a teenager who is interested in learning about investment? Or You as a parent want to inculcate the habit of savings and investments in the beginning of your child’s life?

Do you want to invest down the line but want to learn the ropes from a young age? If you nodded yes to any of these questions, then this article is for you. We will learn about one of the most popular and safest investment options to begin the journey of investmets – fixed deposit.

What is a Fixed Deposit?

A fixed deposit (FD) is an investment instrument that almost every bank and non-banking financial institute (NBFC) offers. In this investment option, you can deposit money for a higher interest rate as compared to the savings account.

You deposit a lump sum amount of money for a fixed tenure, and the interest will be earned over that tenure. The FD interest rate differs from one financier to another. Ideally, you should not withdraw the money before maturity, but you can do the same after paying the required penalty.

How Does FD Work?

If you want to start investing early with FD, you first have to choose how much money you want to invest. After that, you have to choose a tenure of your choice.

There will be a predetermined interest rate for each tenure. For example, it could be 3% for two months, 3.05% for five months, and so on. So, based on your principal amount and chosen tenure, you will earn interest on the deposited amount.

Difference between FD Account and Savings Account

The only similarity between an FD account and a savings account is that they are both a low-risk option of wealth building.

The major difference lies in the interest rates offered. FD accounts offer higher interest rates which are normally around 3-9% as compared to a 2-4% interest rate offered by a savings account.

Types of Fixed Deposits

1. Normal FD: You deposit money for a fixed tenure which can range from 7 days to 10 years. The interest rates are higher than a savings account.

2. Tax-Saving FD: Tax will be exempted on the principal amount of up to 1.5 lakh in a calendar year. However, you cannot withdraw the money for five years which is the lock-in period. You can only deposit a lump sum amount one time.

3. Cumulative FD: The interest is compounded every month, quarter or every year, which is paid at the time of maturity.

4. Non-Cumulative FD: The interest in this type of FD is paid monthly, quarterly, half-yearly, or annually. You can choose tenure. This is a good choice for pensioners who would want a regular income.

5. Flexi FD: Your FD account is linked to your bank account. The money shuffles between your savings account and the FD account.

6. Senior Citizens' FD: This is applicable only for those who are above the age of 60. The tenures are flexible, and the senior citizens are eligible for special interest rates.

Advantages of Investing in FD

Many choose FD for the various advantages it offers. Here are some benefits of investing FD

• Fixed returns: You will get guaranteed returns from an FD account. The interest rate remains constant throughout the tenure, so you don't have to worry about the fluctuating market.
• Easy Investment: For opening an FD account, you can visit the nearest branch or do it online in a few clicks.
• Regular Income: It can offer a regular income if you choose monthly or quarterly interest pay-outs.
• Flexibility: Many think that FD is not flexible, and they couldn't be more wrong. If you need quick funds, you can get up to 90% FD amount as an overdraft. The tenure range is wide, so you can be flexible about that as well.
• Tax-Saving: You can use FDs to save tax by choosing the five-year tax-saving FD. You can benefit from the exemptions under section 80c of the income tax act.

Importance of Investment

It would benefit you tremendously if you know about investment options as a teenager. It would give you a clearer idea of whether you want to invest in FD or not. Since it is one of the safest investment options, FD can be your first investment tool. As you grow, you can start investing in other options.

Investing is important as it ensures present and future long-term financial security. By smart investing, you can build wealth as the years pass by. So, start early and get greater returns as you grow.