Fixed Deposit Accounts - All You Need to Know

The modern world defines stability in terms of the amount of savings a person has accumulated. This subsequently means that savings and investment products are two things that every one of us chases after. Popularly referred to as FD, Fixed Deposit is a type of investment product offered to customers by their banks (as well as NBFCs - Non-Banking Financial Companies). The name fixed deposit is due to the fact that these deposits are made for a fixed period. UAE national and international banks offer fixed deposit accounts with maturity periods lying anywhere between 3 months to 10 years. Some banks take the flexibility one step ahead and offer as little as 7 days (like Emirates NBD) and more than 20 years as fixed deposit tenure.

Fixed deposits are seen as one of the safest ways to save money and earn high profits in the form of interest over time. The interest rate on fixed deposit accounts is comparatively higher than any other type of savings account. Although a lot of factors play a major role in the process of fixing this rate including the tenure of the deposit, type of fixed deposit accounts, and age of the account holder (senior citizens are often offered a higher interest rate). 

How Does an FD Work?

Assume that when you are making a fixed deposit with a bank or an NBFC you are actually lending them the money. The bank will have access to this deposited money for the duration of your tenure and it can use it to further lend it to customers who apply for loans. The bank charges interest on loans and pays you a part of this earned interest in the form of interest paid on the amount you have deposited in your fixed deposit accounts. 

Why do Fixed Deposits with Longer Tenure Earn More Interest? 

It is common knowledge that the longer the tenure of a fixed deposit is, the higher will be the interest rate applicable to it. The reason behind this practice is the concept of the time value of money. The value of money decreases over time which means that whatever one rupee can buy today, it won’t be able to tomorrow because of inflation which decreases the value of money. Hence a compensation is required to be made to the lender (in case of an FD, the lender is you). The longer you have kept the money in a fixed deposit account, the more compensation (i.e., interest) you are entitled to. 

Benefits of Fixed Deposit Accounts

Higher Returns on Investment: Since you will be allowing the bank to have your money deposited for a longer period as compared to savings and other types of accounts, you become eligible to earn more interest on your savings. The longer is the tenure period of a fixed deposit, the more interest it earns. 

Comparatively Lower Risks: Not all investments are fruitful and everyone who is in the game of investing money is aware of that. Several market forces and the ups and downs of the economy affect returns on investment and hence are subject to risk. Fixed deposits, however, give you an assured return on your investment that too at a pre-decided rate which simply translates to low-risk investment for the customers. 

Flexible Liquidity: Regardless of the name “fixed” deposit, FDs allow you a certain level of flexibility when it comes to making pre-mature partial or complete withdrawals. Customers are allowed to make withdrawals on their fixed deposits however it often either results in loss of interest earned or a small withdrawal fee. 

Easiest Investment Product: Unlike other investment tools, fixed deposit accounts are easy to open and even easier to handle. Banks and non-banking financial institutions often offer both online and offline account opening services including net banking and mobile banking. 

Eligibility to Earn Compound Interest: Some fixed deposit accounts also earn compound interest instead of simple interest which means that every passing year, you will be earning interest not only on your deposited sum of money but also the interest earned in the previous year. 

Types of Fixed Deposits

The types of fixed deposit accounts that you find in the market will majorly depend on the bank that you choose to go with. However, there are two basic types of fixed deposits that you can make in the UAE which are explained as follows:

Cumulative: A cumulative fixed deposit account will pay you the interest earned on the deposited money at the time of maturity along with the principal amount. Every single year, your interest gets deposited along with the principle and hence reinvested and eligible for earning interest itself. Cumulative FDs are the ones that earn you compound interest on your savings. This means that the interest is calculated on principal amount + total earned interest amount. 

Non-Cumulative: A non-cumulative fixed deposit will pay out interest to the deposit holder at the end of every ensuring a regular stream of earnings on deposits. The interest applicable on this kind of FDs is the simple interest which means it is calculated only on principle amount. 

Eligibility Criteria and Documentation

Every bank may have slightly different eligibility criteria for every kind of account that they offer to their customers however there are a few basic similarities that you will find everywhere. Fixed deposit accounts are available to open for UAE nationals, residents, ex-pats as well as non-residents. There is a minimum deposit amount that is pre-decided by banks and can range anywhere between AED 3000 to AED 25000. Most banks allow users above 18 years of age to open fixed deposit accounts but some may have different standards. You can easily check this at the time of registration. 

Basic documents required at the time of opening fixed deposit accounts include the following:

• Passport - original and copy (for residents and non-residents)
• Emirates ID (nationals and residents)
• Resident Visa or Address proof (for non-residents)
• Copy of Labour Card (for UAE nationals)
• Salary Slips or letter of salary from the employer
• Bank Statements 

Note that there can be additional documents required as per the desires of the bank. Confirm with your bank beforehand. 

Fixed Deposit Accounts as Joint Holdings

Just like joint savings accounts, fixed deposit accounts can also be opened as joint accounts including two or more individuals as the primary account holders. This also means that all the transactions and operations related to joint fixed deposit accounts will be carried out only after all the primary account holders have given their approval. 

Maturity and Renewal of Fixed Deposits

The maturity of a fixed deposit is decided at the time of making the deposit itself. It simply signifies the time when the deposit is due to be paid back to the customer. A deposit can be either repaid to the customer or the fixed deposit can be renewed. A customer is supposed to instruct the bank what course of action to take as the maturity of the FD arrives. In case a customer fails to let the bank know in time, the balance of the fixed deposit is transferred as an overdraft in the books of the bank until the customer takes an action against it and decides to either get repaid or renew. Banks and financial institutions also offer auto-renewal and auto-withdrawal facilities which can be opted for beforehand. 

How is Repayment of Fixed Deposits Handled?

Fixed deposit amount is paid either by cheque/bank drafts or as direct deposits in the primary functioning account of the deposit holders or the account chosen by them. The account has to be in the name of the depositor and not someone else. Both savings and current accounts can be used to get the fixed deposit amount transferred. 

Can I Make an Early Withdrawal Against My FD?

It is possible to make an early withdrawal against your fixed deposit, partial or complete. Customers should contact their banks in case they want to make an early withdrawal. A penalised interest may be charged in case of an early withdrawal which differs from bank to bank. For example, if the applicable interest rate is 2%, the amount that sums up to 2% of the principle will be deducted from the total interest until the point of withdrawal and the balance will be paid. If the balance happens to be less than or equal to zero, the principal amount will be repaid to the customer. If a part of interest has been paid to the customer beforehand, the bank will deduct the due amount from the principal and repay the balance. 

The Final Word

It needs no convincing that fixed deposit accounts are one of the best ways to invest money and get guaranteed returns. It is possibly one of the lowest risk investments available in the market, it can bring you a lot of benefits if you have a fixed account in your name. Just make sure that you do your research, compare the best available interest rate at the time, and invest wisely. Also, steer clear of the institutions and companies offering unbelievably high-interest returns, which could be a potential fraud. Weigh your options, compare banks and accounts on aggregators like Policy Bazaar UAE and choose the best-fixed deposit account for yourself.