Fixed Deposits are one of the best savings instruments for those looking for assured returns on deposits. A Fixed Deposit is an account opened with a bank wherein, the bank pays a guaranteed interest rate on the sums deposited in a Fixed Deposit account, for a stipulated period or tenure. Creating a Fixed Deposit allows you to higher earn returns on funds lying idle in your Savings Account. But how does a Fixed Deposit work, and why do banks pay a higher interest rate on these deposits? This handy guide will help you understand. Before jumping into how Fixed Deposits function, one needs to understand how banks operate. Banks operate two different verticals, borrowing and lending. A bank provides a safe house for individuals and companies to park their funds. In return for people placing their funds with banks, it pays them interest, depending on the account type. Savings Bank Accounts earn interest but have restrictions on the number of withdrawals and amount of the withdrawals. Current Accounts always provide liquidity and have no limits on the account and fund usage. Hence, they do not command any interest payment.