How Does Fixed Deposits Account Work?

Fixed Deposits are one of the best savings instruments for those looking for assured deposit returns. A Fixed Deposit is an account opened with a bank wherein the bank pays a guaranteed interest rate on the sums deposited in a Fixed Deposit account for a stipulated period or tenure. Creating a Fixed Deposit allows you to earn higher returns on funds lying idle in your Savings Account.

But how does a Fixed Deposit work, and why do banks pay a higher interest rate on these deposits? This handy guide will help you understand.

Before jumping into how Fixed Deposits function, one needs to understand how banks operate.

Banks operate two different verticals: borrowing and lending. A bank provides a safe house for individuals and companies to park their funds. In return for people placing their funds with banks, it pays them interest, depending on the account type. Savings Bank Accounts earn interest but have restrictions on the number of withdrawals and the amount of the withdrawals. Current Accounts always provide liquidity and have no limits on the account and fund usage. Hence, they do not command any interest payment.

Along with Savings and Current Accounts, banks encourage people to create Fixed and Recurring Deposits by providing a higher interest rate. This brings in funds for the bank. Technically, the bank is 'borrowing' funds from you.

With the funds that the bank accumulates through different accounts, it conducts lending operations. Most banks offer customers a wide range of loans, such as Home Loans, Business

Loans, Personal Loans, Car Loans etc. They charge interest from the people who avail of such loans.

The bank's income is the difference between the interest the bank earns on loans and what it pays out on deposits.

Here's a clearer breakdown of how a Fixed Deposit (FD) works:

• Purpose for Banks: Banks provide Savings Accounts and Current Account facilities, but the depositors can withdraw their money at any point. Current Accounts have zero balance requirements, and the amount in those accounts cannot be estimated. Hence, banks use Fixed Deposits to raise a stable source of funds for lending purposes, as they need a steady amount of funds for loans. Unlike Savings or Current Accounts, FDs lock in funds for a set period.
• Deposit Lock-In: When you open an FD, the bank locks your deposit amount for the chosen tenure, which can range from as short as seven days to as long as 10 years. During this time, you cannot access the funds.
• Interest Rates: The interest rate on an FD depends on the duration for which the money is deposited. Longer tenures generally attract higher interest rates.
• Premature Withdrawal: Early withdrawal of an FD is usually possible but comes with a penalty, resulting in a lower interest rate than the agreed rate.
• Maturity: Upon the FD's maturity date, the bank credits the principal amount and the accrued interest to your account. Before committing, review the interest rate, tenure, and other terms to ensure they align with your financial goals.
• FD Calculator: Use an FD calculator to estimate the returns and interest you will earn, helping you make an informed decision about your investment.

Now that you understand how a Fixed Deposit works, go ahead and open your own Fixed Deposit with HDFC Bank today!

You can create your Fixed Deposit Asset today with an HDFC Bank Savings Account. New customers can create a Fixed Deposit by opening a new Savings Account. Existing HDFC Bank customers can create their Fixed Deposit by clicking here.

*Terms and Conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.