Grade 8 Lesson 4: Types of #investments - #fixeddeposits and #termdeposits

#Fixed #deposits (also called #term deposits or #certificate of #deposit #accounts) is an #investment instrument that #banks, non-banking financial companies (#NBFC) as well as some #corporates offer their customers. Through an FD, people invest a certain sum of money for a fixed period at a predetermined rate of #interest. The rate of interest varies from one institution to another. Fixed deposits are available for different periods, ranging from very short-term tenures of 7-14 days to long tenures of 10 years.

Like #bonds, you may think of a fixed deposit as if you are #lending money to the institution. When you invest in an FD, the institution guarantees to return the invested sum at the end of the tenure, known as the #maturity period and pays you interest for it. The institution may use this #money to lend to other #borrowers and charge them interest for the same. A portion of this interest is passed on to you.

The interest offered depends on the tenure or maturity period of the FD. A 7-day fixed deposit will carry a lower annual interest rate compared to a one-year FD. This is to compensate for the time risk of money.

You can choose to reinvest the interest or receive an interest amount periodically in your bank account.
• #Cumulative FDs pay you the interest and the principal at maturity. The interest is reinvested every year. This means that you will not be eligible to receive regular interest payouts, instead of receiving a lump sum at the end of the FD tenure.
• #Noncumulative FDs will pay you interest at fixed intervals. You could choose to receive interest payments monthly, quarterly, half-yearly, or annually, depending upon your needs.

Interest earned on fixed deposits is a function of the amount invested, the rate of interest being offered, and the duration of the investment. This interest will be determined by the #simpleinterest formula for regular payouts or the #compoundinterest formula when you choose the cumulative option.

When you invest in a fixed deposit, the duration of investment or tenure and interest amount is predetermined. The institution also assures you to return your money at maturity. That makes FDs a relatively safe investment avenue. Fixed deposits are a good investment option for:
• People with a low-risk appetite. FDs provide a higher return than money kept in the savings account.
• For meeting short-term goals because returns are assured, and #volatility is low.
• Balancing the #risk in an overall portfolio. Even for those with a medium-to-high risk appetite, investing a portion of your overall funds in fixed deposits balances out the risk from market-linked instruments like #equity or #mutualfunds.
• #Retired individuals who want to ensure the stability of investment.

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