Fixed Deposits

A fixed deposit (FD) is money placed with a bank for a set period at an interest rate agreed at the start. The depositor receives the money back with interest at the end of the term, called maturity, and can usually withdraw early only by paying a penalty or accepting a lower rate. Fixed deposits are also called term deposits or time deposits. The name "fixed deposit" is standard in India, Pakistan, Sri Lanka, Malaysia and Singapore; UK banks sell similar products as fixed-rate bonds or fixed-term savings, Australians say term deposit, and the US cousin is the certificate of deposit (CD).

Fixed deposits are one of the main categories of bank deposits, alongside current deposits, savings deposits and call deposits. Savers use them for money they will not need for a while; banks value them because they are a stable source of funding. Like other deposits, they are debts of the bank and are usually covered by deposit insurance up to a limit.

Think of renting out a spare room for a fixed lease. You agree the rent and the length of stay in advance, and in exchange you cannot ask the tenant to leave whenever you like. The certainty is worth something to both sides.

A fixed deposit is renting your money to the bank. You agree how long the bank can keep it and what it will pay you. Because the bank knows it can use the money for the whole term, it pays more than on an account you can empty tomorrow. If you need the money back early, the bank will usually let you break the deal, but you lose part of the interest.

• Term. Banks offer terms from a few weeks to several years. Longer terms usually pay more, reflecting the shape of the yield curve.
• Rate. The rate is fixed for the term, so the saver is protected if rates fall but misses out if they rise.
• Payout. Interest can be paid out monthly, quarterly or yearly, or added to the deposit and paid at maturity, in which case it compounds.
• Renewal. At maturity the money can be paid out or rolled into a new deposit at the rate then on offer.
• Early withdrawal. Breaking a deposit usually costs a penalty, commonly a cut in the rate paid.
• Borrowing against it. Many banks lend against a fixed deposit, for example through an overdraft secured on the deposit, a common form of collateralized loan.

When interest is added to the deposit and compounded, the amount at maturity is:

• $A$ is the amount received at maturity.
• $P$ is the amount deposited.
• $r$ is the annual interest rate, as a decimal.
• $n$ is the number of times interest is compounded each year.
• $t$ is the term in years.

A deposit of 100,000 at 10% a year, compounded quarterly for one year, grows to $100{,}000 \times (1 + 0.025)^{4} \approx 110{,}381$. If the interest were paid out each quarter instead, the saver would receive 10,000 in total. The difference is the effect of compound interest, and the effective rate of about 10.38% is what an annual percentage yield (APY) figure shows.

Banks fund long-term loans with short-term money, a practice known as maturity transformation. Term deposits reduce the gap, because the bank knows the money will stay until a fixed date. That cuts liquidity risk, and under Basel III liquidity rules, term funding counts as more stable than demand deposits. The cost is a higher interest bill, which narrows the bank's net interest margin (NIM). Banks therefore adjust fixed deposit rates to attract funding when they need it.

In Pakistan, fixed deposits are the time-deposit category in the State Bank of Pakistan's statistics on scheduled banks, which also break them down by maturity. Islamic banks offer term deposits on a mudarabah basis, where an expected profit rate replaces fixed interest. Profit on deposits is subject to withholding tax. Savers often compare bank fixed deposits with government products sold through national savings schemes, whose rates are set by the government. The real return on any fixed deposit depends on inflation over its term.

• Reserve Bank of India
• FDIC: Deposit insurance