Things to know while investing in bank FDs

Given the choice between different types of bank deposits, Swati feels that a fixed deposit (FD) is one of the best investment opportunities because it pays a high rate of interest and is a safe and secure investment opportunity. The interest rate in FDs is determined by the type of lender, the duration of the deposit and the type of investor. She can quickly liquidate her FD to raise funds in the event of an emergency after paying a penalty. It is rightly called a fixed deposit because once she deposits the amount at a fixed interest rate it is not influenced by market fluctuations or interest rate adjustments of the lender in future. However, she wonders if there are certain things that she should remember while opening a fixed deposit account.


The term of an FD could range from seven days to 10 years. Long-term investments are normally for more than three years, medium-term is usually between one and three years, and short-term is usually less than a year. Swati must choose the term based on her risk perception, cash flow requirements and duration perspective. Next, she must choose the lender —bank or NBFC.

Every depositor in a bank is covered up to a limit of Rs 5 lakh for both principal and interest amounts owed to her or him according to Deposit Insurance and Credit Guarantee Corporation (DICGC) guidelines. Swati must make sure that her bank is covered by the DICGC insurance scheme. Bank/NBFC’s credit ratings are measures of likelihood of default or failure. AAA or AA ranking does not ensure that it will not default; it simply indicates that the credit rating agencies do not believe a default is possible. She should always opt for AAA-rated company. Moreover, she should also keep in mind that company FDs are not insured by the DICGC.

The returns on FDs are guaranteed at the time of investment. Interest rates differ across lenders depending on the depositor’s tenure and type. Thus, comparing the highest FD interest rates throughout all banks and NBFCs is essential before making a move. Additionally, in the cumulative alternative, Swati could expect a further augmentation of the FD returns. The interest earned is re-invested on a regular basis in this account. As a result, interest on the FD at the end of the term is higher than on a typical non-cumulative fixed deposit.

In case of an urgent financial need, Swati can readily apply for a loan against her FD through the bank instead of unnecessarily withdrawing the FD. This is a pretty useful feature, considering the funds for the FD will be locked until maturity. Loan against FD is a form of secured loan. This can be somewhere between 90% and 95% of the deposit amount and could be given for a period not exceeding the FD maturity date.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)