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Fixed Deposit

A fixed deposit provides a regular or a cumulative (reinvestment) payout option. Under a regular payout option an investor, through this instrument receives the interest which is credited to the savings account specified by the investor on a monthly basis or on a quarterly basis.

A cumulative option reinvests the interest in the scheme and the interest amount gets compounded to the principal amount on a quarterly basis.

A fixed deposit can be opened for a maximum of 10 years. After the maturity period the investor has to renew the deposits for a fresh tenure. The interest rate on the renewed deposits will be the rates prevailing at the time of renewal. This leads to a reinvestment risk — the risk of investing at a lower interest rates as compared to higher prevailing interest rates. This would lead to a lower payout to an individual.