Term Deposit vs Fixed Deposit

When an account holder agrees to deposit money in a financial institution, such as a bank, he or she receives interest. At the same time, the bank can make a profit by lending to businesses and customers. However, in the case of savings accounts, the depositor can withdraw the money at any time, potentially leaving the bank with insufficient capital to lend.

A term deposit can assist a bank in overcoming this issue. A term deposit and a fixed deposit are the same investment schemes, and only the terminology differs from region to region. 

What is the Meaning of a Term Deposit?

A term deposit is a fixed-period investment that is inclusive of the deposit of money in an account with a financial institution. Term deposit investments typically have short maturities ranging from a month to a couple of years. These will also have various minimum deposit requirements.

Characteristics of the Term Deposits

Consumers are more likely to invest in term deposits when interest rates are rising because the increased cost of borrowing makes savings even more appealing. Furthermore, with high market interest rates, the bank will need to give a high-interest rate to the investor in order for the customer to earn more.

  • Term deposits have a fixed rate for the period of the investment.
  • Term deposits are risk-free, secure, and safe investments since they are backed by the NCUA or FDIC.
  • Having many maturities allows investors to vary the termination dates and build an "investment ladder."
  • The minimum deposit account for term deposits, such as recurring deposits, is rather low.
  • Term deposits offer higher interest rates for larger initial deposits.

Term Deposit vs Fixed Deposit

Because a Fixed Deposit is kept for a longer tenure of time, it yields a higher interest rate. A recurring deposit invests a set amount over a predetermined period of time. This means that each payment generates interest for a shorter period than the prior payment. The interest rate on a Fixed Deposit for the same maturity period is higher than the interest rate on a Recurring Deposit.

A Recurring Deposit, on the other hand, is a convenient manner of investing for persons who have a fixed monthly investment amount. As a result, the investment type is determined by the aims and finances available.

Benefits of a Term Deposit

A depositor can make a deposit in these term deposit or fixed term deposit accounts, promising not to withdraw funds for a set length of the tenure in exchange for a greater interest rate given on the account.

The interest rate on a term deposit account is slightly greater than the interest rate on a conventional savings account or the interest rate on a checking account. The higher interest rates of FD and RD are due to the fact that access to money is restricted for the duration of the term deposit.

Term deposits, while having varying schedules, are exceptionally safe and secure investments with guaranteed returns, making them even more tempting to low-risk, conservative investors. Banks sell financial instruments such as term deposits, which are insured by the DICGC. Furthermore, the NCUA (National Credit Union Administration) ensures those marketed by credit unions.

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How to Invest in a Term Deposit?

Term deposits are sometimes known as certificates of deposits. Customers can examine the terms of a term deposit on paper statements. The statement covers the required minimum principal amount, the rate of interest paid, and the time span or time to maturity of the deposit, as agreed upon by the depositor and the bank at the outset.

In some cases, the bank may request that another account be opened alongside the deposit account. Individuals who want to save money on taxes can consider investing in a 5-year tax-free term deposit with a bank. There are also alternative term deposits that allow you to generate a monthly interest income with a lump sum investment. This is usually for a five-year period.

The investor must understand that when purchasing or investing in a term deposit, funds can be withdrawn only at the end of the term. In some cases, if an investor provides several days' notice, the account holder may allow an early termination or withdrawal. There will also be a penalty for leaving early.

FAQs

Q1. What is the major difference between a term deposit and a fixed deposit?

A term deposit, a fixed deposit, and a time deposit works in the same way and is a similar scheme.

Q2. What makes a term deposit superior to a savings account?

Term deposits, which pay a greater interest rate than savings accounts at banks and post offices, can help you grow your money faster. However, the main disadvantage of a term deposit over a savings account is the potential penalty for early withdrawals from the term deposit. Savings accounts are not subject to this restriction.

Q3. What exactly is a time deposit?

The phrases time deposit and term deposit are interchangeable. It is used to describe a fixed-term interest-bearing bank account. It enables depositors to grow their money at a better rate of interest than a standard savings account. When the term expires, depositors can opt to withdraw their funds or reinvest the proceeds for another term. Time deposits are the official name for Post Office fixed and recurring deposit accounts in India.

Q4. What are the fundamental distinctions between a short-term deposit and a long-term fixed deposit?

A short-term fixed deposit has a maturity time ranging from 7 days to a maximum of 2 years (24 months). A long-term fixed deposit, on the other hand, has maturities ranging from more than two years to ten years. As a result, a short-term fixed deposit has a shorter lock-in time than a long-term fixed deposit.

Q5. Could I possibly get my money back from a term deposit?

Yes, you can withdraw funds from fixed deposit and other term deposit accounts at any time. However, withdrawals from term deposits are subject to numerous penalties as well as lower interest returns.

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