Category: Debt

All about debt investments

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Do all institutions automatically renew fixed deposits made with them?

A bank acts according to the rules that are in force for the fixed deposits made with it.

Other financial institutions follow their own rules and they are not similar to that of the bank.

In case of a matured fixed deposit not claimed by an individual the institution would send the money back to the investor.

There might be cases where maturity instructions are taken from the investor at the time of making the deposit.

The company or institution might also hold the money while the investor makes the claim to the matured fixed deposit.

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What happens in case no instructions at the time of maturity of a fixed deposit?

The fixed deposit comes to an end at the completion of its specified time period.

If the fixed deposit is with a bank then the individual would need to give instructions whether this needs to be continued.

Sometimes there are no instructions that are given and no action is taken at the time of maturity of the deposit.

In such a situation the bank will renew the fixed deposit for a similar time period as the initial deposit.

The investor would need to go later and get the updated deposit details from the bank.

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Is the amount of the rolled over deposit the same as the initial investment?

The investor has a choice when it comes to the amount of the roll over of the deposit.

They can choose to take out the interest earned on the existing deposits and just continue with the initial deposit amount.

This is more likely when the interest is being paid out.

In case of a cumulative deposit the investor can reinvest the whole amount with the interest accumulated or they can take out the interest and reinvest just the initial amount.

Giving the right instructions to the bank is essential in making the choice for the investor,

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What is meant by rollover of a fixed deposit?

A fixed deposit will mature at the end of the specified period chosen by the investor.

The investor can take the initial amount invested at this point of time and use the funds for some other purpose.

The other option available for the investor is to continue with the fixed deposit for some more time period.

This continuation of the fixed deposit is known as a rollover as the deposit continues.

The rollover can be for same period as the initial fixed deposit or the investor can also change it to some other period.

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What is the benefit of making a cumulative fixed deposit?

The benefit of making a cumulative fixed deposit is that it will earn a higher return for the investor.

Consider an example of Rs 1 lakh invested in a fixed deposit at 8 per cent in two cases for 3 years. The first involves the interest to be paid out and the other for the interest to accumulate.

In case of the payout the interest earned over the 3 year period is Rs 24,000.

For the cumulative interest deposit the interest earned at the end of the 3 years is Rs 25,971.

By not taking out the interest the investor has more in hand at the end of the 3 years.

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Is there an example of how a cumulative fixed deposit calculates interest?

Consider a fixed deposit of Rs 1 lakh made for3 years where the interest rate is 8 per cent.

In the first year the interest earned is Rs 8,000 and the deposit is now worth Rs 1,08,000

In the second year the interest comes to Rs 8,640 which is 8 per cent of Rs 1,08,000 and not the initial investment of Rs 1 lakh

In the third year the interest now becomes Rs 9,331 which is 8 per cent of Rs 1,16,640

At the time of maturity the deposit pays Rs 125,971

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When should an investor use compound interest for their deposits?

Compound interest on deposits leads to a higher earning year after year.

This method should be used when the investor does not require a payout from their investment.

This will allow them to continue with the investment for a longer time duration.

During this period the base for interest calculation will continue to rise.

This proves to be a relevant compensation for not touching the money for a long time period.

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When should an investor choose simple interest for their investments?

Under simple interest the investor earns interest on a fixed base.

Year after year the base amount does not change.

When this is the case there is no point in keeping the interest earned with the lending institution.

The investor should take out the interest that they have earned.

This method of interest calculation should be used only when a payout of the interest earned is needed

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Are there different ways of calculating interest on a fixed deposit?

The calculation of interest on the fixed deposits will vary according to the choice made by the investor.

A fixed deposit that pays out interest will have a simple interest calculation. For example a 8 per cent deposit for Rs 1 lakh will have an interest of Rs 8,000 a year.

In case the payout is less than a year than the amount is paid proportionately so in the example above a half yearly payout will lead to a payment of Rs 4,000 every 6 months.

A cumulative fixed deposit will calculate interest every year which keeps getting added to the initial amount.

In these deposits the interest earned every year will rise as the base rises

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Is there only a specific time period for the interest payout on the fixed deposit?

The interest payout on the fixed deposit depends on the institution where the deposit is made and the policies that it follows.

Some companies for example pay out the interest only annually on their fixed deposits.

Financial institutions and banks however give a larger choice for their investors.

Here the interest can be received either quarterly or half yearly or annually.

In some specific type of deposits only the option of a monthly payout of interest is available but this is rare,