Home Investments Fixed Deposit Importance of tenure in Fixed Deposit

Importance of tenure in Fixed Deposit

In India, Fixed Deposit(FD) is the backbone of the Indian Middle Class Economy. Since it earns more interest than saving accounts and not as uncertain as Capital Market, It is one of the most popular Financial Investment Instrument. This financial Instrumentis provided by bank, financial institutions, Co-operative societies, Post Office and other companies. In this, the investor gives a lump sum amount to FD provider for a given time and earns interest on it. Thetime period and interest rates are fixed by the providers of the instrument. The rate of interest on this One-Time Payment plan depends on the amount, time period and the financial Institution.

Tenure in Fixed Deposit

It is often asked that why one should pay attention on the tenure before investing in FD. The Time Period or the Tenure plays a key role in deciding the rate of interest of the fixed deposit. Generally, the longer the tenure, higher is the rate of Interest of FD. But some banks may offer higher rate of interest on shorter tenure deposits (If they expects the Repo Rates to decrease in future).The tenure of FD can vary from 7 days to 10 years. Investors should understand the necessity of keeping tenure in mind before investing in FD. It can help in answering the motive of their investment. On the basis of tenure, we can divide FD in the following three categories:

Short Term FDs

These are the FDs whose maturity period is one year or less. These are suitable for Investors who do not have built-up capital and want to have hedge against sudden requirement of a lump sum amount. Short Term Fixed Deposits are popular in Investors who are new to investment and want to create wealth. Sometimes, thesehelp in earning high interest rates.

Middle Term FDs

The FDs whose maturity period is in between 1 and 3 years are called Middle Term Fixed Deposits. These arechosen by those investors who have their back covered by some insurance plan for the emergency lump sum amount. These are suitable for those who have form a decent wealth and do not want to take risk in Capital Market. Since the tenure period is not too long, the investor prefer these for near-term requirement.

Long Term FDs

When the tenure is between 3 and 10 years, these are known as Long Term Fixed Deposits. These are mainly adopted by those investors who want to secure their investment from uncertain Interest Rate for a long term. These are preferred by mainly those investors who want to conserve their investment funds for a stretched duration.

The Tenure of FD is not only important to the investors, but, also to the FD provider. Presently, Investors can withdraw their FD by Premature withdrawal orbreaking their FD before the tenure expires. In this they suffer loss in interest rate or penalty. But under the new rules of RBI, banks will provide customers with the choice of locking in their FD for the whole tenure, or tend to have an option open for the premature withdrawal. Those customers who choose full-tenure FD will be offered higher interest rates than those who want to have an option open.This shows the importance of tenure in Fixed Deposit.

5 COMMENTS

Tejaswini November 8, 2015 at 5:25 pm

I am one of the individuals who believes in the fact that Fixed Deposit is the safest and easiest type of investment. For me interest incurred from FD month on month provides me satisfaction of being secured. The article clearly explains the types of fixed deposits and the importance of tenure under the scheme.

rkadakia November 9, 2015 at 5:39 am

My observation is short term duration FDs and middle term duration FDs have hardly any differences these days. Also, despite RBI decreasing the repo rates, the same is not reflected by the banks in terms of offering higher interest rates on savings and FDs to their customers. Even RBI insisted banks to pass on the benefits to the customers by offering higher interest rates on their savings to attract more investments. The banks have however failed to do so, more so by not giving any clear explanation for it

Parul November 12, 2015 at 4:45 pm

Depending upon the requirement of saving tax, there are two common FD tenures, 1 year and 5 years. Experts advise that one should go for long tenures in case of high interest rate environment and for short tenures in case of low rate environment. The investor earn different rate of interest based on the amount deposited , age and tenure.

garima November 14, 2015 at 4:41 pm

Generally, the longer the tenure, higher is the rate of Interest of FD. The article describes the significance of tenure in terms of all three types of FDs but according to the new norms , banks will provide customers with the choice of locking in their FD for the whole tenure, or tend to have an option open for the premature withdrawal. Those customers who choose full-tenure FD will be offered higher interest rates than those who want to have an option open.

Kitty Macalpine February 13, 2016 at 3:33 am

Tenure just refers to a time period. Best not to open a very long tenure fixed term deposit unless you have other sources of income.
Really, this type of deposit is very secure and very profitable. But it also locks up your money with huge penalty rates if you need to access your money before tenure is up. Maybe try opening a small tenure FD first, see how it goes and how you survive. Then later you can reinvest in a longer tenure on your next FD.