Different Types of interest rate in Fixed Deposits

One of the most rampant types of investment in India is the Fixed Deposit. It enables one to invest his/her funds for a stipulated period of time with a financial institution at a particular rate of interest. FDs can be of 2 types –

●     Issued by a bank or a NBFC that is regulated by the Reserve Bank of India

●     Issued by a Corporate looking to raise funds from the ‘open’ market

While there are variations in the rates of interests paid against FDs issued by banks and corporates, the latter usually pay a superior rate due to the fact that they carry more risk as compared to bank FDs, and they lack the aspect of easy liquidity generally implied in the former.

Types of interest rates for FDs

At the base level, FD interest rates can either be ‘Fixed’ or ‘Floating’.

Fixed Rate FDs

As understandable, fixed-rate FDs are offered at a fixed rate of interest for a specific deposit period. The investor can hereby look forward to get a definite and assured return as per the contracted rate after the tenure expires, no matter where the base rate in the market stands. The product is safe, guaranteed and built to generate a regular income within the deposit tenure.

Floating Rate FDs

Floating rate FDs are offered at a variable rate of interest for a term. SBI for instance has it on offer. A floating rate deposit, however, comes without a guarantee of sure return as the interest rate is liable to change with a change in the BR or the base rate of the bank. Hence, it is an option which should be picked only if the investor is ready to receive flexible returns. If the base rate increases the investor will gain but if it falls, he/she might wind up losing much more than a fixed-rate investment.

At higher level FD interest rates depend on the following factors –

●     Deposit period

●     Institution type

●     Deposit amount

Most financial institutions offering FDs have an FD interest calculator included in their websites whereby interest to be earned on the deposit money can be calculated easily. Some institutions might refer to the same as ‘Term deposit calculator’ as FDs are also popularly known as Term Deposits.

Depending on the tenure of the FD made, interest rates can be calculated –

●     On quarterly basis (banks in India employ quarterly compounding for calculating interest in Rupees)

●     @ simple interest (mostly seen in FDs that are made for below 6 months)

In instances of premature encashment, the FD interest rate is computed as per the rate that is applicable for actual deposit period, and a penalty may/may not be levied, depending on the institution’s policy.

It’s important to remember that at certain times when the economic scenario of the country reels under high inflation, RBI has the freedom to take up a stringent monetary policy whereby it can enhance its repo rates, that is, its lending rate for banks. In line of that, banks can also hike their loan rates and FD interest rates, both. At these times, FDs are the most lucrative form of investment with high-return and no-risk assured in them.