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Fixed Deposit Advice for Students and Working Professionals

06 July 2022

In today’s times, it is imperative to start saving and investing at an early age. With constantly increasing costs of living and rising inflation rates, the value of money can erode within a few years. Today, it is important for people to be prepared for emergency expenses and plan their savings and investments to achieve life goals like marriage, purchasing a house, children’s higher education, etc.

There are many avenues allowing people to invest their savings and earn good returns. Of these, Fixed Deposits continue to remain a popular and trusted name. 

Why should you invest in a Fixed Deposit?

Regardless of whether you are a student or a working professional, when you invest your hard-earned money, you want to get maximum returns with minimum risks. While there are many market-linked investments available like stocks and mutual funds, when you invest in them, you carry the risk of booking losses if the markets move against your judgment. 

The biggest benefit of investing in a Fixed Deposit is that the returns are not linked to how the market performs. The institution offers a fixed rate of interest for the tenure and amount selected by you.

This helps students and working professionals plan their finances without having to worry about potential losses.

Tips for students and working professionals on FD

While Fixed Deposits are the most popular investment options in India since they are very safe and offer guaranteed returns, there are some things that you must know about them 

Minimum Deposit Amount

If you are a student or have just started working, then make sure that you check the minimum deposit limit set by the bank or financial institution. Usually, banks do not accept Fixed Deposits of less than Rs.5,000 or Rs 10,000, though this varies with institutions. You can also start with an amount lesser than that (Rs. 1000 range) if you explore more. 

Loan against FD

Most financial institutions offer loans against Fixed Deposits to help you manage any financial emergencies without having to break your investment. This is an important feature.

  • Example

Let’s say that you have opened a Fixed Deposit of Rs.2 lakhs for three years at the rate of interest of 8% per annum. One year after booking the deposit, you have a financial emergency and need Rs.50,000. At that time, the rate of interest on Fixed Deposits has dropped to 6% per annum.

If you were to break your FD and start another one for Rs.1.5 lakhs, then you will get interest at a lower rate of 6% per annum. However, if you take a loan of Rs.50,000 against your existing FD, then you can retain your high-interest-paying deposit and get a loan at a lower interest rate.

Cumulative Fixed Deposit

In a regular fixed deposit, interest is paid out to the deposit holder every calendar quarter. If you don’t need the interest, then you can opt for a Cumulative Fixed Deposit. In this deposit, the interest amount is added back to the FD. This increases the principal amount and allows you to earn more interest.

  • Example

Let’s say that you open a Fixed Deposit of Rs.2 lakhs for three years at the rate of interest of 8% per annum. If this is a regular fixed deposit, then you will receive a quarterly interest of Rs.4000 every three months. Therefore, at the end of three years, you will have received Rs.48,000 as interest.

However, if you opt for a Cumulative Fixed Deposit at the same interest rate and for the same tenure (with quarterly compounding), then on maturity, you will receive a total interest of Rs.53.648. 

Hence, you can earn additional interest of Rs.5,348 by not withdrawing interest from your deposit every quarter.

Premature Withdrawals

When you open a Fixed Deposit account, you enter into a contract with the financial institution for the tenure of the deposit. The institution, in return, promises to pay interest at the agreed rate.

However, if you need to prematurely withdraw the invested amount, then it is possible too. However, the financial institution might charge a penalty for the same. Make sure that you are aware of the terms and conditions surrounding premature FD withdrawal before opening the account.

Minimum and Maximum tenure

Most banks offer Fixed Deposits for a minimum tenure of 7 days up to a maximum of 10 years. 

Summing Up

For students and working professionals, Fixed Deposits can be a great tool to create a corpus without taking any market-related risks. While the returns are lower than those offered by stocks and mutual funds, the risks are nearly non-existent. Hence, FDs can help you begin your investing journey and create the initial corpus without having to worry about the performance of your investments.

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