As a popular investment instrument in the financial market, Fixed Deposit Receipt (FDR) is one of the safest ways to invest money with a guaranteed return. In this article, we will discuss FDR, its full form, meaning, how it works, and its advantages and disadvantages.
What is FDR?
A Fixed Deposit Receipt (FDR) is a financial instrument offered by banks and other financial institutions to investors. It is a type of deposit scheme that allows individuals to invest a lump sum amount for a fixed period and earn a fixed rate of interest on it.
At the end of the tenure, the investor receives the principal amount along with the interest earned on it.
Full form of FDR
FDR stands for Fixed Deposit Receipt.
Meaning of FDR
The meaning of FDR is that it is a financial instrument that enables investors to invest their money for a fixed period and earn interest on it. The interest rate is determined at the time of investment and remains fixed throughout the tenure.
How does FDR work?
FDR works on a simple principle. An individual invests a lump sum amount for a fixed period, ranging from 7 days to 10 years, and earns a fixed rate of interest on it.
The interest rate is determined at the time of investment and remains the same throughout the tenure.
At the end of the tenure, the investor receives the principal amount along with the interest earned on it.
How to Invest in an FDR
Investing in an FDR is a simple process. Here are the steps you need to follow:
- Choose a bank or financial institution where you want to invest.
- Decide on the amount you want to invest and the investment period.
- Submit the application form along with the required documents.
- Make the investment amount via cheque or online transfer.
- Receive the FDR receipt.
Things to Consider Before Investing in an FDR
Before investing in an FDR, there are a few things you need to consider:
- Interest Rate: The interest rate is an essential factor to consider when investing in an FDR. Compare the interest rates offered by different banks or financial institutions to find the best rate for your investment.
- Investment Period: The investment period is the duration for which you want to invest your money. Choose an investment period that suits your financial goals.
- Penalty for Premature Withdrawal: Before investing in an FDR, check the penalty charged by the bank or financial institution in case you withdraw your investment before the maturity period.
- Minimum Investment Amount: Different banks or financial institutions have different minimum investment amounts. Choose a bank that suits your investment amount.
FDR vs. Other Investment Options
FDRs are just one of the many investment options available to investors. Here’s how FDRs compare to other investment options:
FDR vs. Stocks
FDRs are low-risk investments, whereas stocks are high-risk investments. The returns on FDRs are fixed and guaranteed, whereas the returns on stocks are volatile and depend on market conditions.
FDR vs. Mutual Funds
FDRs are low-risk investments, whereas mutual funds are high-risk investments. The returns on FDRs are fixed and guaranteed, whereas the returns on mutual funds are volatile and depend on market conditions.
FDR vs. Real Estate
FDRs are low-risk investments, whereas real estate is a high-risk investment. The returns on FDRs are fixed and guaranteed, whereas the returns on real estate depend on market conditions.
Advantages of FDR
- Safe investment: FDR is a safe investment option as it offers a guaranteed return on investment.
- Fixed interest rate: The interest rate remains fixed throughout the tenure, providing stability and predictability to investors.
- Higher interest rate: FDR offers a higher interest rate compared to savings accounts, making it an attractive investment option for risk-averse investors.
- Easy to understand: FDR is a simple investment option that is easy to understand and operate.
Disadvantages of FDR
- Low liquidity: FDR has low liquidity as the money invested is locked in for a fixed period.
- Penalty on premature withdrawal: If the investor withdraws the money before the maturity period, a penalty is charged.
- Fixed interest rate: The fixed interest rate offered by FDR can be a disadvantage when the interest rates in the market increase.
Types of FDR
- Ordinary FDR: In an ordinary FDR, the interest earned is paid at the end of the maturity period.
- Cumulative FDR: In a cumulative FDR, the interest earned is compounded and paid along with the principal amount at the end of the tenure.
- Tax saver FDR: Tax saver FDR is a type of FDR that allows investors to claim a tax deduction on the amount invested under section 80C of the Income Tax Act.
Difference between FDR and RD
Recurring Deposit (RD) and Fixed Deposit Receipt (FDR) are two popular investment options offered by banks. The main difference between RD and FDR is that in RD, the investor deposits a fixed amount at regular intervals, while in FDR, the investor deposits a lump sum amount for a fixed period.
Taxation on FDR
Interest earned on FDR is taxable under the Income Tax Act. The tax is deducted at source (TDS) by the bank or financial institution at the prevailing rate. The rate of TDS depends on the investor’s income tax bracket and the interest earned on FDR.
How to get an FDR?
To get an FDR, an individual needs to visit a bank or financial institution and fill up the necessary forms. The investor needs to provide his/her PAN card, address proof, and identity proof along with the application. The minimum amount of investment and the tenure varies from bank to bank.
Renewal of FDR
FDR can be renewed by visiting the bank or financial institution before the maturity period. The investor can either renew the FDR for the same tenure or opt for a different tenure.
Breaking of FDR
Breaking of FDR means withdrawing the money before the maturity period. The investor needs to fill up the necessary forms and pay a penalty for premature withdrawal. The penalty varies from bank to bank and depends on the tenure of the FDR.
Premature withdrawal of FDR
Premature withdrawal of FDR is possible, but it attracts a penalty. The penalty varies from bank to bank and depends on the tenure of the FDR. In some cases, the interest rate applicable on premature withdrawal is lower than the original rate.
Conclusion
In conclusion, FDR is a popular investment instrument that offers a guaranteed return on investment. It is a safe and secure investment option that provides a fixed rate of interest throughout the tenure.
FDR has its advantages and disadvantages, and investors need to evaluate their financial goals and risk appetite before investing in it.
FAQs on FDR
Can I withdraw my FDR before maturity?
Yes, you can withdraw your FDR before maturity, but it will attract a penalty.
Can I renew my FDR after maturity?
Yes, you can renew your FDR after maturity.
What is the minimum amount required to invest in FDR?
The minimum amount required to invest in FDR varies from bank to bank.
What is the difference between FDR and RD?
In RD, the investor deposits a fixed amount at regular intervals, while in FDR, the investor deposits a lump sum amount for a fixed period.
Is the interest earned on FDR taxable?
Yes, the interest earned on FDR is taxable under the Income Tax Act.