A term deposit is a form of fixed-term investment where you have to deposit money at a financial institution for a specific term. They are generally utilised by the general public for short-term investments as their maturity term ranges from a month to a few years.
This type of investment allows you to withdraw your funds only after the maturity period ends. A term deposit is often confused with a fixed deposit, but both are different, which we are going to uncover in our article. Read on to find out the term deposit meaning, its features and how one can invest in these types of deposits.
A term deposit is a form of deposit facility provided by a financial institution where the deposited money is secured for a specific time period. The term deposit generally offers a higher rate of interest than other savings accounts. These types of deposits don’t provide the flexibility to withdraw money as and when the customer likes. The depositor can only withdraw the sum amount at the end of their maturity period.
Term deposits are considered a secure investment, making them highly attractive to risk-averse and cautious investors. These deposits are offered by banks, thrift institutions, and credit unions. When obtained through banks, term deposits are safeguarded by the Federal Deposit Insurance Corporation (FDIC), while credit-union sold deposits are covered by the National Credit Union Administration (NCUA).
Term deposit meaning can be best understood after analysing its unique features. Here are some of the features of term deposits that you must know before investing in one:
- Term deposit requires you to keep the amount you wish to deposit in your mind.
- The interest rates on Term Deposits remain unaffected by the flow of the market. These deposits are locked in for a predefined period.
- When you withdraw term deposit funds prematurely, it incurs a penalty.
- Depending on your preference, interest on your deposit can be received monthly, quarterly, or yearly. In non-cumulative Term Deposits, interest payments are made at agreed-upon intervals.
- Term Deposits as an investment avenue come with limited flexibility in terms of immediate access to your funds.
- There’s no limit on the funds you can allocate to a Term Deposit account.
- The documents needed for establishing a fixed deposit are straightforward and easy to understand.
As a popular investment avenue, Term Deposit has its own set of prerequisites which you must keep in mind before investing in them. Here are some of the factors that you must keep in mind in terms of term deposits.
- Fixed Interest Rate: Term deposit interest rates are generally fixed, meaning they are not affected by any market fluctuations. The depositor is entitled to receive a fixed amount of interest for their set term of maturity.
- Fixed Investment Tenure: The investment tenure for term deposits is fixed, but the depositor has the flexibility to select their preferred investment tenure. The tenure for these term deposits generally ranges from one year to ten years. A longer tenure reflects a higher rate of interest.
- Rollover alternatives: The depositor can choose to reinvest automatically at the end of the term deposit tenure with new interest rates. In rollover options, you may not have to withdraw your earnings to deposit it again. You can easily set up the automatic rollover option whenever you wish.
- Interest Payments: The interest on term deposits are available on two basis: Cumulative and Non-Cumulative. The Cumulative interest payment lets you collect your interest payments at the end of the investment tenure. The non-cumulative is a popular basis for interest payments where you can receive your interest monthly, quarterly, semi-annually, or annually.
- Insurance on term deposits: As per the rules and regulations of RBI, all banks have to insure their deposits of the limit of INR 500,000 prevailing on the cancellation or liquidation of the bank’s license.
The process of investing in term deposits is easy. If you already have a savings account with a financial institution already providing a term deposit facility, then the process of application becomes simplified. The eligibility criteria for different financial institutions may differ. Therefore, it is best to check the requirements of your desired bank before applying for term deposit investment.
The standard procedure for term deposit application requires you to submit important documents like Permanent Account Number (PAN) card and Aadhaar Card. Depending on your bank, the procedure may take place both online and offline. Here are the standard steps to apply for term deposits online:
- To initiate an online term deposit application, ensure you have an active net banking feature and a valid PAN card number.
- Once you’ve entered your username and password into the online portal, you’ll gain entry into the array of online services the bank offers.
- Among the available options, you can choose to create a term deposit account, which is listed as one of the service choices.
- Following this selection, you must input your account details and provide nominee information if applicable.
- The next step involves deciding and entering the amount you intend to allocate for the deposit account.
- Before deciding on the amount, it’s important to assess the correlation between the interest rate and the chosen tenure, aligning it with your personal requirements.
- If you choose a non-cumulative term deposit, you will then have the option to decide on the frequency of interest payments – like fortnightly, monthly, quarterly, or annually.
- After everything is done, you need to submit your request and wait for it to process. If processed successfully, your term deposit account will be generated within one to two business days.
Many people consider term deposits and fixed deposits as the same scheme of fund investment. However, regardless of how similar they are, both of them differ in terms of flexibility, interest rates, and tenure. The whole term deposit vs fixed deposit debate can be best understood by breaking down both in these aspects.
- Flexibility: The Fixed Deposit investment requires the entire investment amount to be invested collectively but in a term deposit or post office term deposit, you have the flexibility to pay in installments.
- Interest Rates: A fixed deposit investment doesn’t offer you a high rate of interest, unlike term deposits. But, they provide their customers with a safe and guaranteed interest rate.
- Tenure: Term deposits have a short-term investment, the interest payments of which can be easily assessed using a term deposit calculator or self-calculations. But a Fixed Deposit investment offers a long-term investment opportunity.
Term Deposits are among the most popular investment opportunities that lets you lock up your money for a specific term. This type of investment has a short-term maturity that lasts for a month to a few years. Term deposits have the unique characteristics discussed above that make them different from fixed deposits. A depositor can invest in these deposits using the standard steps mentioned above. However, the steps are subject to change with the bank. So, make sure to check the unique requirements and set of procedures laid down by the bank before applying for term deposits.