A fixed deposit account, also known as a term deposit or time deposit, is a type of financial instrument provided by banks and other financial institutions. It enables you to deposit a specific amount of money for a set of period of time at a fixed interest rate.
In summary, this is how a fixed deposit account works:
Deposit: You make a deposit into a fixed deposit account, the minimum amount of which varies based on the account specifications.
Term: You decide how long you want the money to be locked up for. The duration can range from a few months to several years. Premature withdrawal of funds may result in penalties during this time period.
Interest Rate: Because you are committing to keeping the money untouched for a defined amount of time, the fixed deposit rate is usually higher than what you would receive in a standard savings account.
Interest Calculation: The interest on a fixed deposit is usually calculated on a simple interest basis or compounded interest basis. Simple interest is calculated only on the initial principal amount, whereas compounded interest is calculated on the principal and the interest earned in previous periods. The interest can be paid out periodically (monthly, quarterly, annually) or at maturity.
Maturity: The fixed deposit matures at the end of the term chosen. You have the option of renewing the deposit for another term or withdrawing the funds and the accumulated interest. If you do not give instructions as the account holder, certain banks may automatically renew the deposit for the same term at the prevailing interest rate