Understanding the Impact of Inflation on FD Interest Rates

A Fixed Deposit(FD) is an investment that includes a money deposit in a financial institution. The investor can withdraw the deposit after a fixed period, and the interest rate is also improved. An FD calculator is used to optimize and choose a plan.

They usually offer relatively higher interest rates than other traditional liquid savings accounts because access to funds is allowed only for a limited timeframe. They are extremely safe and, therefore, an attractive option for low-risk investors.

What is an FD?

Fixed deposits are also called term deposits and are a viable option for people with low-risk appetite. You deposit a lump sum amount in your bank for a fixed tenure at an agreed FD interest rate. After completion, you get the principal amount plus the compound interest.

Depending on the terms of the agreement, the investor may or may only be able to withdraw funds after maturity. Usually, a penalty amount is deducted if the funds are withdrawn before the stipulated time.

Advantages of FD

1. Safe and secure

This is the most safe option among all the other investment options. The risk involved is negligible, and it helps you earn guaranteed returns, thus eliminating any uncertainty. The interest offered will remain the same throughout the tenure.

2. Flexible tenure

Fixed Deposits offer a very flexible tenure ranging between 7-10 years. You decide the term of your investment according to your financial plan. There is also an option of auto-renewal at the end of maturity, automatically renewing your investment plan if opted for from the beginning.

3. Tax saving

Under the Income Tax Act, fixed deposit investors can deduct a certain amount from their annual taxable income. This makes it the perfect tax-saving tool and gives you guaranteed returns. There is a mandatory lock-in period; therefore, it can not be withdrawn before maturity.

4. Benefits to Senior citizens

The benefits to senior citizens are comparatively more as higher FD interest rates and a higher limit for TDS deductions are offered. Most banks offer higher interest rates above 60 years of age. The rate is 0.25% to 0.50% more for older people.

5. Loan

You can also get a loan against your fixed deposit account amount. The loan that you get is a percentage of the total amount in your FD account. It can range from 60-90% of the amount in your deposit account. This feature can be availed in times of emergency.

Impact of inflation on FD interest rates

Inflation is the rise in the price of goods and services over a period of time, meaning that the value of the rupee might be different in the future. So, it is imperative to calculate FD interest rate factoring in inflation and being aware of the actual difference between an on-paper number and actual returns.

Usually, the interest rate offered on FDs is lower than the inflation rate, so the actual money value eventually falls. The rate falls further after-tax deduction in long-term FDs. So, opt for a short-term FD to evade the effect of inflation on your investment.

Conclusion

Although interest rates do get affected by inflation, recently, I availed an FD from Bajaj Finserv, and I got great returns as it has the highest safety and credibility ratings. They offer best FD interest rates in India, providing interest up to 9%.

So, if you want to earn safe interest on your idol capital, Fixed Deposit is the way to go about it.