Term Deposit vs Fixed Deposit

Term deposit and fixed deposit are considered to be two popular investment option which allows investors to grow their money in a very secure and predictable manner. In both of these investment option, an investor has to deposit a certain amount of money for a fixed period of time in return for a fixed interest. However, there are some differences between term deposit and fixed deposit which one should consider before investing. 

This article provides a brief explanation of term deposit vs fixed deposit, features and benefits. 

Term Deposit Meaning

A term deposit is a fixed-period investment option offered by several banks and  financial institution. Term deposit investments generally have short maturity period ranging from one week to five years. They also have minimum deposit requirements and earns you guaranteed returns with a fixed interest rates.

Features of Term Deposits

Here are few of the key characteristics of term deposits:

  • 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 low.
  • Term deposits offer higher interest rates for larger initial deposits.

Fixed Deposit Meaning

A fixed deposit(FD) is a type of deposit account that allows you to invest a lump sum of money for a fixed period of time at a fixed interest rate. The lock-in period for an FD can range from one month to 10 years. Once the investor deposits the FD amount in the bank, it starts earning an interest depending on the deposit tenure. One can also choose to withdraw their money before maturity, however, they will have to pay the penalty charges for pre-mature withdrawal.

Features of Fixed Deposit

Given below are some of the major characteristics of fixed deposits:

  • Fixed deposits offer a guaranteed and fixed rate of interest for the entire tenure. This makes them a safe and reliable investment option.
  • Fixed deposits are available for a variety of tenures, ranging from 7 days to 10 years, which allows investors to choose a tenure according to their financial goals.
  • It offers compound interest, which means that interest is earned on the principal amount as well as the accumulated interest. 
  • FDs allows investors for premature withdrawal but with a penalty.
  • One can also avail a loan against your fixed deposit, generally up to 90% of the principal amount. 

Difference Between Term Deposit and Fixed Deposit

Although Term Deposits, also known as certificates of deposit are similar to fixed deposits. However, there are certain differences between term deposit and fixed deposit based on the features provided below:

Term Deposit vs Fixed Deposit

Features

Term Deposit

Fixed Deposit

Interest Rates

It can have both fixed or variable interest rates based on the market conditions.

It has a fixed interest rate throughout the tenure.

Deposit Tenure

It has tenure ranging from few weeks to 5 years.

It has a predetermined tenure ranging from few months to upto 10 years.

Flexibility

It is more flexible as compared to FDs.

It offers less flexibility.

Penalty on Premature Withdrawal

Applicable.

Applicable.

Suitable Investors

Best suited for short-term investors.

Best suited for mid-term to long-term investors.

Also read: Types of Fixed Deposits 

Difference between FD and RD

Benefits of Term Deposit

Here are some of the key benefits of 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 are exceptionally safe and secure investments with guaranteed returns, making them even more tempting to low-risk, conservative investors. 

Benefits of Fixed Deposits

Here are some of the major benefits of a fixed deposit:

    • Flexible interest payout options: You can choose to receive the interest earned on your fixed deposit on a monthly, quarterly, or annual basis, or at the end of the tenure.
    • Automatic renewal: You can set up your fixed deposit to automatically renew at maturity, for the same tenure and interest rate. This can help you avoid the hassle of opening a new FD every time.
    • Online access: Most banks and NBFCs now offer online access to fixed deposit accounts. This allows you to open, manage, and close your FD account at your convenience.
  • Tax Benefits: Under Section 80C of the Income Tax Act, FD offers tax benefits up to Rs.1.5 lakhs to investors from their taxable income for investments made in 5-year tax saving FDs.

 

Comparison of FD rates

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