Page Contents
Introduction
knowing what a fixed deposit account is and how to choose the best-fixed deposit account is crucial when it comes to money management. Saving and investing are ever involving as the desire of man continually increases. There’s always a lookout for ways to better increase income to be profitable and as well take care of unforeseen circumstances. There’s a constant lookout for a man to get better with his finances.
Thus the emergence of various financial institutions among which is the bank which has been validated to offer financial services to meet his financial goals. The banks made provisions for various account types to help take care of this issue.
Simply put, the emergence of banks brought the various account types, ranging from savings to fixed deposit accounts which is our focus of this article. But before we go much further, let’s take a pause and examine what a fixed deposit account is all about, its advantages and disadvantages to you or your business and how to choose the best-fixed deposit account.
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WHAT IS A FIXED DEPOSIT ACCOUNT?
There are numerous definitions of the term, but to be more specific, we’ll be looking at the definition offered by Wikipedia and one another.
Here’s a definition offered by Wikipedia.
A fixed deposit (FD) is a financial instrument provided by banks or NBFCs which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account.
It is known as a term deposit or time deposit in Canada, Australia, and New Zealand, a fixed deposit in India and the United States, and a bond in the United Kingdom, and a fixed deposit, means that the money cannot be withdrawn from the FD as compared to a recurring deposit or a demand deposit before maturity.
Moreso, a fixed deposit account also known as FD can simply be referred to as an investment instrument that banks and non-banking financial companies (NBFC) offer their customers. Through a Fixed Deposit (FD), people invest some amount of money for a fixed period at a predetermined rate of interest in an FD. The interest rate varies from one financial institution to another, although it is usually higher than the interest offered on savings accounts.
Fixed deposits are available for different periods, ranging from very short-term tenures of 7-14 days to long tenures of 10 years. A fixed deposit is sometimes known as a term deposit.
Benefits
Liquidity
An asset is said to be liquid when you can easily convert it into cash. The same goes with fixed deposits which are liquid. Although you as a holder will be charged a certain amount of penalty, FDs can be withdrawn as and when needed. Therefore, you always have a certain sum of money in the bank.
Returns Of Investments Are Assured
Investment in fixed deposits gives you an assured return. The returns are generally over and above the returns offered by a savings bank account. Unlike the stock market where your returns depend on the ups and downs of the market.
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However, returns on your investment vary as per the tenure of investments. It is important to note that currently, banks are offering returns ranging from 7% to 8% as per the tenure. Make sure you don’t break the FD in between because it may affect your returns due to premature withdrawals.
Risk Managing Instrument
Some of the instruments can give you higher returns but are volatile, like mutual funds, gold ETFs, ULIPs, etc. Therefore, it becomes necessary to invest in debt instruments to adjust the market risk. FDs are the best for managing that kind of risk when you are planning for long-term financial goals in your life.
Disadvantages Of A Fixed Deposit Account.
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No Flexibility
No flexibility to access your funds because your money is locked away with the bank, often for months (sometimes years), and you lose the flexibility of a regular, day-to-day savings account.
If you do withdraw your money from your fixed deposit account before the agreed maturity date, you will likely be penalised in the form of reduced interest or penalty fees. This is one of the major constraints of a fixed deposit account.
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Low Return Of Investment.
Although Fixed Deposit accounts pay higher interest rates when in comparison to regular day-to-day savings accounts. However, because fixed deposits are very low-risk investments, they offer lower returns relative to other investment options like properties, shares, bonds, stocks, cryptocurrencies and a host of other investment opportunities.
While fixed deposits provide you maximum protection against uncertainty unlike the ups and downs of the stock market, they offer poor protection against inflation. For example, if your fixed deposit interest rate is at 3.5%, and the current inflation rate is 3%, the value of your money has effectively only increased by 0.5% (i.e. 3.5% – 3% = 0.5%) too bad if you have your money in an FD for years and inflation hits you up by that percentage almost equivalent to your expected interest rate.
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It’s Not A Walk In The Park.
Unlike other exotic and risky investments, fixed deposits are safe and boring (the time it takes for its maturity is not necessarily a bad thing though). Some people may not like the very fact that you know in advance how much profit you will end up earning if you stay on course for the entire investment term. If active participation is what you are seeking, a fixed deposit is probably not a suitable investment choice for you
How To Choose The Best Fixed Deposit Account
Having discussed what a fixed deposit account is, its benefits and as well as its disadvantages. Next would be the criteria for choosing the best-fixed deposit account.
We’ll be discussing these criteria under three (3) points and they are as follows.
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Tenure Of The Fixed Deposit
The rate of interest on fixed deposit accounts varies with tenure. This means for different tenures, the FD interest rates are different. Most of the time, fixed deposits with longer tenures have higher interest rates.
Moreover, the longer lock-in period of your money for that tenure, and, thus it compromises the option of liquidity. So, if you want to invest your money to fulfil your short-term goals, it is recommended to invest in short tenure FD. The tenure of fixed deposits varies from seven (7) days to ten (10) years and you can select the one that best suits your needs.
So, it is recommended to opt for a bank that offers flexibility in tenures.
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Premature Withdrawal
Before you decide to open a fixed deposit account with any bank, it is best advised to check the bank’s terms and conditions of premature withdrawal to know if its operation is suitable for you. Generally, the banks provide the clauses for premature withdrawal on their website. Most banks deduct penalties on a premature withdrawal from FD and give you an option for liquidity.
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Rate of Interest
This is the number one reason you should look out for when deciding on opening a fixed deposit account. The interest rate offered on fixed deposits is one of the most important factors to consider. Higher the rate of interest greater the returns from FD. So, you can opt for a bank that offers a higher rate of interest on fixed deposits.
Conclusion
from the research presented above, it presents you the information about a fixed deposit account, what it entails, the benefits, and the disadvantages. More importantly how or what to look out for when choosing the best-fixed deposit account among which is to look out for the interest rate, the penalty attached to premature withdrawal and arguably the tenure of the fixed deposit account.
