এফডিআর Fixed Deposit (FDR)

A fixed deposit, an FDR, is money placed with a bank for a fixed term at a fixed rate. Nearly every family in Bangladesh knows it, and for many people saving simply means an FDR.

It is slightly different from what it seems, and the difference is worth understanding. In an FDR you are lending to the bank. The bank lends that money on at a higher rate and keeps the difference. You are a creditor, not an owner, and that is why your return is fixed: whether the bank does well or badly, you get the contracted rate.

How the rate is set

The rate a bank offers does not come from nowhere. Three things set it: Bangladesh Bank's policy rate, the bank's own need for money, and competition.

When the policy rate rises, deposit rates rise across banks, because government treasury bills now pay more and banks have to compete with them. That is why a Bangladesh Bank decision reaches your FDR rate, and why those news items are worth reading.

The real return

This calculation recurs throughout this school, because it is the sum nobody performs. The advertised rate is an advertisement; what survives tax and inflation is yours.

The penalty for breaking

One feature of an FDR that nobody reads at the counter: break it early and the rate falls dramatically. Break a three year deposit at eleven months and you may get the savings account rate instead of the three year rate, and in some cases a penalty on top.

Which is exactly why an emergency fund does not belong in an FDR. An emergency does not wait for maturity, and breaking one on the day you need the money means losing the year's interest.

If a bank fails

Bangladesh has deposit insurance: if a bank is wound up, each depositor is covered up to a set limit. The government changes the limit, so it is not written here, and Bangladesh Bank's site has it.

In practice large banks here are not allowed to fail; they are merged or supported. It is still worth knowing, and there is a practical consequence: splitting a large deposit across two or three banks rather than one is a reasonable precaution.

Who a fixed deposit is for

The answer matches the goals lesson: money needed in one to three years whose amount has to be certain. A wedding, an admission fee, a known business instalment. That money is wrong in shares and right in a deposit.

Money needed in ten years, left in a deposit, spends ten years running level with inflation and standing still.

Check yourself