What is a Term Deposit, Its Benefits, Features and Should You Invest

A term deposit is a broad term used by banks and non-banking financial companies (NBFCs) to refer to investments like a fixed deposit or recurring deposit that are made for a predetermined period of time to earn higher interest than a savings account. Find out details regarding how term deposits work, and the key differences between term deposit vs. fixed deposit from an investor’s perspective....Read More

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What is a Term Deposit?

A term deposit is a fixed-term investment, including the deposit of money at a financial institution in an account. The term deposit investments generally carry the short-term kind maturities, ranging from a month to a couple of years. These will also have varying levels of required minimum deposits.

In case you are wondering what is time deposit, term deposits are same as time deposits and come with high-interest rates compared to conventional savings accounts, wherein the customers can withdraw money at any time as per their needs. Common examples of term deposits include fixed deposits (FD) and recurring deposits (RD).

Key Features of Term Deposit

In a time of rising rate of interests, the consumers are more likely to invest in term deposits since the increased cost of borrowing makes the savings even more attractive. Additionally, with high market interest rates, the bank will need to offer the investor a high interest rate, so that the consumer also earns more.

• Term deposits come with a fixed rate of interest over the life span of the investment

• Term deposits are risk-free, secure and safe investments since NCUA or FDIC backs them.

• Several maturities allow the investors to stagger the end-dates and create an ‘investment ladder’.

• Term deposits such as recurring deposits have a comparatively low minimum deposit account.

• For the larger initial deposit amounts, term deposits pay higher rates.

Benefits of Term Deposit

When it comes to a term deposit, a consumer agrees to lock away money for an agreed upon span of time. In return, the consumer gets a guaranteed rate of interest for the term selected. This way, the consumer is aware of when can they get their invested money back. Term deposits come with an array of benefits and, therefore, are the ‘most popular savings product’.

· A guaranteed return

When it comes to term deposits, the return is agreed upon with the financial institution at the time of purchase, which ultimately indicates that the individual investing will be aware of the interest they will earn prior to deposition of the money, based on the term and the amount.

· Fixed remuneration

In contrast to the variable investments, the term deposits offer a fixed remuneration across the lifetime of a product investment as guaranteed by the DGF (Deposit Guarantee Fund). Term deposits offer a reduced risk as compared to the other saving products and are also under the protection of the Deposit Guarantee Fund.

· Purchasing a term deposit is easy and quick

An individual can make a purchase of the term deposit in a hassle-free way and a matter of a couple of minutes. The bank lets you purchase the deposit online as these are simple products, and no extensive or deep-rooted knowledge is required in investing for the same.

You decide how long you want to maintain the deposit. The conditions of a term deposit cannot be changed: as a product with a specific duration, banks cannot change any of the conditions agreed upon at the time of purchase.

· Flexible date of maturity

It is in the hands of the investor to decide the time span for which they want to maintain the deposit. However, the terms and conditions of a term deposit as agreed at the time of a purchase can in no way be modified.

· A great option for the conservative and low-risk investors

Term deposits are the best choice for low-risk or conservative investors who are reluctant to take risks and want guaranteed investments. While purchasing a term deposit, it is important to be aware and clear that there will be no need for money in the agreed period because if an individual chooses to withdraw it earlier than usual, there will be a penalty charged.

How Can a Depositor Benefit From a Term Deposit?

A depositor can make deposit in these term deposit or fixed term deposit accounts, agreeing on not withdrawing funds for a fixed period in return for a comparatively higher interest paid on the account. The interest rate earned on a term deposit account is slightly higher than that paid on the standard savings or the interest rate in checking accounts. The higher interest rates of FD and RD are because access to money is limited for the timespan of the term deposit.

Therefore, term deposits can have different timelines but are an extremely safe and secure investment with guaranteed returns and are even more appealing for the low-risk, conservative group of investors. Financial instruments like term deposits are sold by the banks and are insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation). Additionally, The NCUA (National Credit Union Administration) provides coverage for the ones sold by credit unions.

Fixed Deposit vs Term Deposit

• A term deposit is often used when the deposit is extended for a certain period, say 3 months, 6 months etc. Fixed deposits, on the other hand, are used when the deposit is for a period of 6 months or greater than that. The deposit amount offers a higher rate of return as compared to the banks’ savings accounts.

• In both types of investment options, the investor deposits a certain sum of money for a period to earn an interest rate on it.

• Bank deposits are highly secure with no actual downsides or risks involved, especially when it comes to returns.

• The accounts can be easily opened by simply approaching the bank. On maturity, the principal amount and the interest are payable. If the investors do not specify a mandate, the deposit is renewed for another fixed term at a prevalent rate of interest.

• In both cases, at the time of a premature withdrawal of FD, a penalty is levied from the investor as a relatively lower rate of return than the contracted rate.

How To Invest In a Term Deposit?

Term deposits are also referred to as the certificate of deposits. Customers can view these conditions of a term deposit through a paper statement. The statement includes the needed minimum principal amount, the rate of interest paid and the time span or the time to maturity of the deposit, as initially agreed by the depositor and the bank.

The bank, in some instances, can ask to open another account with the deposit account. For saving on taxes, an individual must consider investing in a 5-year tax saving term deposit with the bank. Furthermore, there are other term deposits that allow earning an interest income monthly with a lumpsum investment towards the same. This is generally for a 5 year period.

The investor must understand that when buying or investing in the term deposit, it is possible to withdraw funds only after the end of the term. In a few cases, the account holder may allow an investor for an early termination or a withdrawal if given notice several days prior. Also, there will be a penalty for early termination.

Frequently Asked Questions (FAQs)

A term deposit account is a type of deposit account held at a financial institution with money in it for a set period. Term deposit accounts are usually deposits with maturities ranging from a few days to a few years.

The terms time deposit and term deposit mean the same thing. It is used to refer to an interest rate-bearing bank account with a fixed term. It allows the depositors to grow money with a higher rate of interest as compared to the regular savings account. After the term is over, the depositors can choose to withdraw money, or the proceeds can be reinvested for an additional term. In India, Post Office fixed and recurring deposit accounts are officially called time deposits.

Yes, you can make premature withdrawal from fixed deposit and other term deposit accounts. However, withdrawal from term deposits are subject to various penalties and also lower interest earnings from the deposit.

Term deposits can help you grow your money faster with a higher interest rate than a savings account at the bank or post office. That said, the key limitation of a term deposit vs savings account are the penalties that might be applicable to withdrawals made before maturity of the term deposit. No such restriction is applicable to savings accounts.

The maturity term for a short-term fixed deposit is from 7 days to a maximum of 2 years (24 months). On the other hand, the maturity term for a long-term fixed deposit ranges from more than 2 years and up to 10 years. So, a short-term fixed deposit leads to a shorter lock-in period of your money as compared to a long-term fixed deposit.

ARN: May23/TD/25E

Sources:

www.thebalance.com/what-is-a-term-deposit-5188865

www.bajajfinservmarkets.in/fixed-deposit/short-term-fd-vs-long-term-fd.html

www.bajajfinserv.in/insights/6-reasons-why-an-fd-is-better-for-you-than-a-savings-account

www.financialexpress.com/money/premature-withdrawal-of-term-deposit-how-to-do-it-without-paying-any-penalty/2031956/

www.bajajfinservmarkets.in/fixed-deposit/time-deposit-vs-fixed-deposit.html

www.bajajfinserv.in/term-deposit-meaning-features-benefits-types

www.rbi.org.in/Scripts/NotificationUser.aspx?Id=1784&Mode=0

www.goodreturns.in/classroom/2016/06/what-is-the-difference-between-term-deposit-fixed-deposits-462928.html?story=4

m.rbi.org.in/scripts/FAQView.aspx?Id=64

www.yesbank.in/money-matters/what-is-fixed-deposit-account-features-and-benefits-of-fixed-deposit

www.financialexpress.com/money/fixed-deposits-how-fd-laddering-can-maximise-your-investment-benefits/1792759/

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What is a Term Deposit, Its Benefits, Features and Should You Invest

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