When it comes to investment options, fixed deposits are one of the most preferred ones among Indian investors. Many renowned financial institutions, mostly banks, offer fixed deposit options at competitive rates of interest. Demand deposit and fixed deposit are two variations of deposit schemes, and their differences primarily lie in their interest payout, liquidity and accessibility.
This blog will discuss both types in detail, and you can choose which one is an ideal choice as per your investment goals.
Key Differences between Demand Deposits and Fixed Deposits
First, let’s take a look at the parameters, which segregate them from each other. The following table lays down their differences from each other:
|Parameters||Demand Deposit||Fixed Deposit|
|Meaning||You can access a demand deposit and withdraw any amount required. You don’t need to notify the bank beforehand.||You cannot access or withdraw any fund from a fixed deposit during the lock-in period or until its maturity.|
|Duration||Demand deposits do not have a lock-in period or a similar time-bound clause.||Fixed deposits do have a lock-in period.|
|Rate of Interest||Demand deposits have a minimal rate of interest which can range between 4% and 6%.||Fixed deposits enjoy a higher rate of interest which can range between 7% and 9%.|
|Penalties||There is a penalty or similar charges levied for withdrawing funds from a DD prematurely.||If you want to withdraw funds from a fixed deposit before its maturity, the bank may levy a penalty or withdrawal charge.|
Demand deposits offer higher liquidity and accessibility. However, these accounts have one downside, which is a low rate of interest. Some banks may also levy additional charges for maintaining the accounts.
You can withdraw any or the entire amount from a demand deposit account as and when required without notifying the bank beforehand. Some examples of demand deposits can be money market accounts, incorporated savings accounts and checking accounts.
Fixed deposits, which are also known as term deposits, have zero liquidity and low accessibility. However, fixed deposits attract a higher rate of interest. Hence, it is a good option for investment if you have a stable regular income source and want to build a large corpus over a long period of time.
The main difference between demand deposits and fixed deposits is their liquidity. You cannot withdraw funds or assets from a fixed deposit account before its maturity or during the lock-in period. If you do, the bank or financial institution will levy a penalty or withdrawal charge, which is usually between 0.50% and 1% of the interest.
The most prevalent example of a fixed or term deposit is the Certificate of Deposit (CD). At the end of the term, you can renew or withdraw the fund from a fixed deposit.
The choice between demand and fixed deposits depends entirely on your financial preferences and goals. To help you make your decision more carefully, here are some pros and cons of each type.
- High liquidity and easy accessibility
- Suitable for meeting daily or regular requirements of funds or online purchases
- Earn interest in a savings account
- Unlimited withdrawal in the current account
- Banks may impose a limit on the number of withdrawals from savings accounts each month
- No interest earned in a current account
- Flexible tenure of investment, which can range anywhere between 7 days and 10 years
- Availability of loan against fixed deposit amount
- Earn a higher amount of interest than DD and take advantage of compounding
- Several choices of account in the cumulative and non-cumulative form
- Lock-in period; hence, zero liquidity
- Premature withdrawal attracts liquidity, resulting in a loss
A demand deposit is ideal to accommodate your regular financial needs due to its high accessibility. You can pay your bills and spend on groceries and other daily needs. Additionally, you get the benefit of direct deposit of government-sponsored receipts into your account.
On the other hand, a fixed deposit parks a large amount of your fund for a predefined period. You cannot withdraw prematurely, and if you do, it attracts a penalty. However, these accounts attract a higher rate of interest and are ideal for building a corpus with the benefit of compounding.
Make sure you understand the differences between demand deposit and fixed deposit properly and weigh the upsides and downsides carefully before choosing one. Careful financial decisions are the pillar of a successful and stress-free financial future.