FD Rules: Why is a Fixed Deposit the safest investment option? You'll get a guarantee of ₹5 lakh even if the bank fails..

Whenever safe investments are discussed, the first thing that comes to mind is Fixed Deposits (FDs). For years, Indian investors have considered FDs the most reliable way to save money. The reason is clear: there is no fear of losing money, and the returns are predetermined. Most people who want to avoid the fluctuations of the stock market still consider FDs the most comfortable investment option.

However, sometimes people invest in FDs out of habit without understanding the rules. Therefore, it's important to know why FDs are considered safe, how secure the money is, and how to get better returns from them.

Why are FDs considered a safe investment?
Fixed Deposits are considered a safe investment because they are directly linked to the banking system. India's banking system is strong and operates under strict regulations, which has built public trust. When you open an FD with a bank, you know in advance how much money you will receive after a certain period, and there is no risk of sudden losses.

₹5 lakh guarantee
However, it's also important to know that according to RBI regulations, a person's bank deposits are insured up to ₹5 lakh. This means that if the bank faces a crisis for any reason, the amount up to ₹5 lakh remains safe. Despite this, public confidence in the Indian banking system is quite strong, which is why FDs are considered safe.

Government bank FDs are more secure.
The security of an FD also depends on the type of bank. FDs in government banks are considered the safest because they have the backing of the government. Large private banks come next, and they are also considered safe. Smaller finance banks usually offer higher interest rates, so many people open FDs there for higher returns.

However, before making a decision based solely on higher interest rates, it's important to understand that a balance between security and returns is crucial. The interest rate on an FD is fixed at the time of opening and remains the same throughout the tenure, regardless of whether market interest rates rise or fall.

Benefit of compounding at FD maturity
In a Fixed Deposit, money grows slowly but steadily. It benefits from compounding, meaning the interest earned is reinvested, further increasing your principal amount over time. Over time, the interest also starts earning interest, which increases the amount at maturity.

Let's say someone invests ₹5 lakh in a fixed deposit (FD) at 7 percent interest for five years. If the interest is compounded multiple times a year, the final amount received will be more than what would be earned with simple interest. This is why long-term FDs are considered more beneficial.

Why are long-term FDs more beneficial?
Time is the biggest factor in an FD. The longer the money remains in the FD, the greater the benefit of compounding. The difference may seem small initially, but the amount starts growing rapidly year after year. Long-term FDs also help in combating inflation. If the interest rate on your FD is higher than the inflation rate, the real value of your money is preserved. This is why many people consider FDs a strong foundation of their financial plan.

How to get better returns from an FD?
If you want better returns from your FD, let the interest be reinvested in the FD instead of withdrawing it every month. This allows you to reap the full benefit of compounding. Also, investing in FDs of different tenures can be beneficial, so that you don't have to break the entire FD in case of need.

Disclaimer: This content has been sourced and edited from Navbharat Times. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.