As long as C: remains fat32 then you can install '98 into C: (if you must...) or D: - the better location - which is what you intend.
Run '98 setup from the usual boot-disk etc., or a CD boot; point it to install to D: .
Afterwards you will need to run XP setup\repair to restore the XP mbr - which will have been overwritten by '98 when it went in. You will then have a dual-boot.
'98 will have installed its boot/start-up files in C: alongside the XP OS. Reformat C: and you lose acces to '98; likewise convert C: to ntfs(5) and again you lose access to '98. Ideally each OS boot-files only would be in C: , with each OS system files (each OS itself) in separate partitions/logical-drives. The C: common boot/startup files location (active Primary) would be a format that all installed OS can acess - at all times... (It could be fat16 or fat32.)
What you will have established is part way there, and is a satisfactory compromise approach.
Same rules apply to '98/W2K, and to XP/W2K...