A fixed deposit (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account. It is known as a term deposit or time deposit in Canada, Australia, New Zealand, and the US, and as a bond in the United Kingdom and India. They are considered to be very safe investments. Term deposits in India and Pakistan are used to denote a larger class of investments with varying levels of liquidity. The defining criteria for a fixed deposit are that the money cannot be withdrawn from the FD as compared to a recurring deposit or a demand deposit before maturity. Some banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates. It's important to note that banks may offer lesser interest rates under uncertain economic conditions.
Fixed deposits are a high-interest -yielding Term deposit and offered by banks in India. The most popular form of Term deposits are Fixed Deposits, while other forms of term Deposits are Recurring Deposit and Flexi Fixed Deposits (the latter is actually a combination of Demand deposit and Fixed deposit).
To compensate for the low liquidity, FDs offer higher rates of interest than savings accounts. The longest permissible term for FDs is 5 years. Generally, the longer the term of deposit, higher is the rate of interest but a bank may offer a lower rate of interest for a longer period if it expects interest rates, at which the Central Bank of a nation lends to banks ("repo rates"), will dip in the future.
Usually in India, the interest on FDs is paid every three months from the date of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest installment would be paid on 15 May). The interest is credited to the customers' Savings bank account or sent to them by cheque. This is a Simple FD. The customer may choose to have the interest reinvested in the FD account. In this case, the deposit is called the Cumulative FD or compound interest FD. For such deposits, the interest is paid with the invested amount on maturity of the deposit at the end of the term.