Types of fixed deposits: Choosing the right fixed deposit scheme for your investment portfolio

Fixed deposits (FDs) have long been a preferred investment option for individuals looking for secure and assured returns. Whether you are a conservative investor seeking stability or someone looking for an optimal mix of liquidity and returns, selecting the right fixed deposit scheme is crucial.

In this guide, we will explore the different types of FD, their benefits, and key considerations for making an informed fixed deposit investment decision.

What should you know about fixed deposit investment?

A fixed deposit is a financial instrument where an investor deposits a lumpsum amount with a bank or financial institution for a pre-defined tenure at a fixed interest rate. FDs are considered a low-risk investment option as they offer guaranteed returns, making them an attractive choice for risk-averse investors.

Depending on your financial goals, you can choose from various types of fixed deposit schemes that offer different interest rates, tenures, and payout options.

What are the different types of FD schemes?

Fixed deposits come in various forms, each designed to cater to specific financial goals and investor preferences. Whether you seek liquidity, higher returns, or tax benefits, selecting the right FD scheme is essential. 

Below is a detailed breakdown of the most common types of fixed deposit schemes available in India.

1. Regular fixed deposit

This is the most common fixed deposit scheme where investors deposit a lumpsum amount for a fixed tenure and earn interest at a predetermined rate.

• Tenure: Ranges from 7 days to 10 years.
• Interest payout: At maturity or periodically (monthly, quarterly, or annually).
• Liquidity: Premature withdrawals are allowed with a penalty.
• Best for: Individuals seeking safe and steady returns.

2. Cumulative fixed deposit

A cumulative FD is ideal for investors looking to grow their wealth over time, as the interest is compounded and reinvested instead of being paid out periodically.

• Interest payout: Paid at the end of the maturity period.
• Higher effective yield: Since interest is compounded.
• Best for: Investors who do not need periodic income and want to maximise returns.

3. Non-cumulative fixed deposit

In a non-cumulative FD, interest is paid out at regular intervals (monthly, quarterly, semi-annually, or annually), providing a steady source of income.

• Best for: Retirees or those looking for regular interest payouts.
• Lower effective yield: Since interest is not reinvested.

4. Tax-saving fixed deposit (under section 80C)

This special FD helps investors save on taxes while earning assured returns.

• Lock-in period: 5 years
• Tax benefits: Up to Rs. 1.5 lakh deduction under Section 80C of the Income Tax Act.
• Best for: Salaried individuals and taxpayers seeking tax savings.
• Downside: Premature withdrawals are not allowed.

5. Senior citizen fixed deposit

A special FD scheme offering higher interest rates to individuals above 60 years of age.

• Higher rates: Typically 0.5% to 0.75% higher than regular FDs.
• Best for: Retirees looking for a safe investment with better returns.
• Taxation: Interest earned is taxable but eligible for exemptions under senior citizen tax rules.

6. Flexi or sweep-in fixed deposit

A hybrid FD that links your savings or current account with an FD. When the account balance exceeds a set threshold, the surplus amount is converted into an FD.

• Liquidity: Allows withdrawals without breaking the FD entirely.
• Best for: Business owners and individuals with fluctuating cash flow.
• Interest rate: Higher than a regular savings account.

7. Corporate fixed deposit

Offered by Non-Banking Financial Companies (NBFCs) and corporates, corporate FDs provide higher interest rates than bank FDs but come with slightly higher risk.

• Interest rates: Can be 1-2% higher than bank FDs.
• Risk: Depends on the creditworthiness of the issuer (check credit ratings).
• Best for: Investors willing to take moderate risks for better returns.

8. NRE & NRO fixed deposits (for NRIs)

These FDs cater specifically to Non-Resident Indians (NRIs) who wish to invest in Indian FDs.

• NRE FD: Tax-free in India, allows full repatriation.
• NRO FD: Taxable interest, partial repatriation allowed.
• Best for: NRIs looking to park earnings in India while managing taxation.

9. Foreign Currency Non-Resident (FCNR) fixed deposit

Designed for NRIs, FCNR deposits allow investment in foreign currencies like USD, GBP, or EUR, protecting against currency fluctuations.

• Tax benefits: No tax on interest in India.
• Best for: NRIs looking for secure returns in foreign currencies.

10. RBI floating rate bonds (FD alternative)

While not an FD, RBI Floating Rate Bonds are a great alternative for those seeking secure returns with a variable interest rate linked to the National Savings Certificate (NSC) rate.

• Tenure: 7 years
• Interest rate: Floating, revised every six months.
• Risk: Zero risk as backed by the Government of India.
• Best for: Long-term investors wanting inflation-adjusted returns.

What factors should you consider before choosing a fixed deposit scheme? 

Before selecting an FD, investors must evaluate the following key factors:

1. Interest rates: Compare rates offered by different banks and NBFCs.
2. Liquidity needs: Opt for a flexi FD if liquidity is a priority.
3. Tenure: Longer tenures offer higher interest rates.
4. Tax implications: Understand TDS on interest income and tax-saving FD options.
5. Institution’s credibility: Always choose banks or NBFCs with high credit ratings (AAA-rated FDs are the safest).
6. Premature withdrawal rules: Be aware of penalties before investing.

How to choose the right fixed deposit investment?

A fixed deposit scheme remains one of the safest and most reliable investment options, offering assured returns with flexibility in tenure and payout options. While regular and tax-saving FDs cater to most investors, specialised options serve distinct financial needs. Senior citizen FDs offer higher returns for retirees, flexi FDs provide liquidity for businesses, and corporate FDs yield better returns for risk-tolerant investors.For those looking for a well-balanced portfolio, combining FDs with market-linked instruments like mutual funds or online trading platforms can help optimise returns while maintaining stability. Additionally, consulting a financial advisor can help investors select the most suitable FD based on their financial goals and risk tolerance.