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- Fixed Deposits
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There are several features of a fixed deposit that set it apart from various other investment options present in the market. These features determine the nature of the entire investment and how it will behave under different circumstances. Here are the important features that need attention:
1. Debt investment
A fixed deposit is a debt investment. This means the amount is invested with the feature considering that this will be returned to the investor once the specified time period is over. This is different from an equity investment where there is a chance of a risk with regard to the amount invested because the investor becomes the owner of the company. In case of a fixed deposit, the investor is only lending the money to the bank or the institution.
The investor who buys a fixed deposit takes on the role of a lender in the entire transaction. In this case, the bank or financial institution taking the money is the borrower. Once the position of the lender is established, it means that the bank has to pay back the amount that has been borrowed from the investor. In that sense there is a responsibility of the bank to return the money to the investor. This also impacts the feature of the investment, which underlines that there is meant to be safety of the capital invested unlike an equity investment where even this might be lost.
3. Specified interest
There is a return that is earned by the investor when he/she gives a fixed deposit to the bank. The return here is measured by using the term ‘interest’. Interest is nothing but the amount calculated at a specified rate of return on the amount invested. There is an element of surety for the investor because the person knows the interest rate at the time of making the deposit itself and due to this reason he/she also knows the amount of money that will be earned from the investment. The important thing is that even if economic conditions are very good or very bad the investor will keep earning the same rate of interest, so this becomes like a fixed figure that is earned by the investor.
4. Time of repayment
Another important feature of the fixed deposit is that the investment is for a specified period of time that is already known to the investor at the time of making the investment. At the end of the specified period, the investment will come to an end and the amount will be returned to the investor. This means that the investor knows the return for the specified time and hence he/she is able to know precisely what he/she is earning and also how the cash flow will be present in the future.
Basic features of a fixed deposit
One Response to “Basic features of a fixed deposit”
deef said on April 28th, 2011 at 4:16 pm