STOCK GYAN. (Part – 8, Deposits)Atul Khurana
Till the previous parts, we had discussed completely about Long Term Debt Asset Class Instruments and started with Short Term Debt Asset class instruments under which we had discussed:
- Bond Futures & Options on Bond Futures
- Interest Rate Swaps
- Interest Rate Caps & Floors, Interest Rate options, Exotic Derivatives
- Bills and Commercial Papers
Also, refer the 1st part of the stock gyan series for having better understanding of the sequence and types, sub types etc.
Let’s come to the next category of Financial Instruments under Short Term Debt Asset Class. The name of this category is Other Cash Category under which we will discuss about Deposits.
So, starting with the term Deposits.
Meaning of Deposits:
As per Wikipedia, A deposit is money placed with some other entity. It is a credit for the party who placed it, and it may be taken back (withdrawn), transferred to some other party, or used for a purchase. It is often used with respect to banks, where deposits are usually their main source of funding.
Now if I explain this term in simple language then it will be quite easy to relate with your routine life.
You might have deposited some money in bank on some certain date and in some certain mode that may be fixed deposits or any other type of deposit. Means you had given your money to bank for sometime which you can easily withdraw anytime depending on some conditions in case the money is deposited under some scheme or some special kind of deposit under which there is some lock in period.
There are primarily two reasons for deposits:
- Safe custody of money
- Earning Interest
Type of Deposits:
- Term deposits
- Fixed Deposits
- Tax Saving Deposits
- Recurring Deposits (RD)
- Cumulative & Non-Cumulative Deposits
- Sweep Account Deposits
- Post office time deposits
- Senior citizen term deposits
- Corporate Fixed Deposits
- Children Deposits
The deposits held for a fixed period of time are known as Term deposits. The fixed period of time is known as Lock in period that means the money is locked for a fixed period and the depositor cannot withdraw the money before the end of lock in period.
The money is locked in at present interest rate.
Term deposits are further classified into the following:
A fixed deposit (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. There is no need to create separate bank account for FD’s.
Benefits of FD’s:
- High Liquidity
- Risk Free Investments
- Highly flexible in terms of amount and lock in period
Tax Saving Deposits
These are some special kind of deposits under which the Income Tax Act, 1961 provides exemption to the tax payers upto Rs. 1.5 Lac under section 80C. This scheme can only be availed by the Individuals and HUF’s and in case there are joint holders of the account, the exemption will be granted to the first holder of the account. The lock in period of these deposits is 5 years and no withdrawal is permitted before the end of lock in period.
Recurring Deposits (RD)
If your parents are in service sector specifically in government jobs then you might have heard about RD’s from them. This is similar to Fixed Deposits (FD) but these deposits comes with special features. Under these types of deposits, the person can deposit he amount on monthly basis
Cumulative & Non-Cumulative Deposits
The difference among these deposits is the payment of interest amount.
The interest is payable on regular intervals i.e. every quarter or six monthly or yearly on the deposits in non- cumulative deposits but,
In cumulative deposits, interest is not payable on regular intervals rather the interest in paid at the end of the tenure along with the principle amount.
For example: if you had deposited Rs. 10,000 at 10% p.a. then you will receive interest payment at regular intervals i.e. once in a year, twice a year or quarterly in case of non-cumulative deposits and in case of cumulative deposits, the interest amount is accumulated and not paid on regular intervals. The amount will be paid at the end.
Sweep Account Deposits
This is an automated bank facility provided to account holders under which the amount if exceeded the minimum balance to be kept in savings account is automatically transferred fixed deposits account. This automatic transfer is called Sweep Deposit.
For example: you have decided to keep minimum Rs. 10,000 in your savings bank account and instructed the bank about the same. Now, whenever your balance will exceed Rs. 10,000 then automatically the exceeded amount will be transferred to fixed deposit account.
Post office time deposits
These are the deposits offered by the Indian postal services on which a fixed amount of interest is paid to the investors. The interest is calculated quarterly but paid annually. The minimum amount required to invest is Rs. 200 and there is no maximum limit on the amount to be invested.
The following are the rates of interests offered on these deposits:
- For a Tenure of 1 year – 1% p.a.
- For a Tenure of 2 years – 2% p.a.
- For a Tenure of 3 Years – 4% p.a.
- For a Tenure of 5 Years – 9% p.a.
Senior citizen term deposits
As the name suggests itself, this scheme is offered to only Indian senior citizens on which a fixed rate of interest is paid.
Corporate Fixed Deposits
These are the fixed deposits offered by NBFC’s i.e. Non Banking Finance Companies. These deposits offers high rate of interest as compared to the Banks. Generally, the minimum lock in period of these deposits is 3 to 6 months.
This are the special kind of fixed deposits offered to the children. Under this scheme, the parent or guardian handles the account until the child reaches the age of maturity.
Some of the most common types of Children Fixed Deposits are:
- PNB Balika Shiksha Scheme
- Allahabad Bank Sishu Mangal deposit scheme
- Fixed deposits under guardianship for minors
These above are the types of deposits in India. There is one more term associated with deposits i.e. Certificate of Deposits.
Meaning of Certificate of Deposits (CD)
These are the money market instrument, which is negotiable and equivalent to a promissory note. It is either issued in demat form or in the form of a promissory note. These instruments are issued in exchange of funds for specified period of time.
These can be issued by all the scheduled banks except Rural regional Banks and Local Area Banks. The minimum amount for which it can be issued is Rs. 1 Lac the further amounts can be received in the multiples of Rs. 1 lac only.
The main point to note is, there is no lock in period in certificate of deposits.
Here we end this part.
In the next part we will discuss about the Next category of short term debt asset class i.e. Exchange-traded derivatives under which we will discuss about Short-term interest rate futures.
So, don’t miss it.
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