Fixed Deposits are among the most preferred investment tool for getting higher returns on maturity. It is not only a beneficial route of investment but also the safest among other instruments. With time, term deposits are also becoming a popular source of investment for people looking to increase their earnings in the short term. This gives rise to the ever-rising debate of short term deposit vs fixed deposit.
Regardless of how similar both investment opportunity looks, they have unique benefits to offer to the customers. You can always weigh their pros and cons to see which investment is the one for you. But before that, let us first understand both term deposits and fixed deposits in depth.
What is a Term Deposit?
A term deposit is a type of fixed-term investment where the investor deposit money at a financial institution for a specific term. These types of investments typically possess a maturity period of a month to a few years. Term deposits yield zero to low-risk investments and give the depositor higher returns on their investment.
Term Deposits offer a higher rate of interest as compared to other investment instruments. This type of deposit gives the benefit of saving despite any market fluctuation affecting the rate of interest. The interest rate for this deposit falls in the range of 6% p.a for short-term deposits and 8-9% p.a for long-term investments, say 5 years.
Features of Term Deposit
Term Deposits are enticing to the general public when the interest rate the bank offers is high. There are several other features of term deposits that make it better to understand. Some of them are:
- Term deposits offer a fixed interest rate throughout the investment duration.
- Term deposits are regarded as secure and risk-free investments as they are backed by organisations like NCUA or FDIC.
- The availability of multiple maturity dates enables investors to diversify termination times and construct an “investment ladder.”
- Even individuals with less savings can open term deposits, as they typically require a low minimum deposit.
- Term deposits provide higher interest rates to the higher deposits.
What is a Fixed Deposit?
A fixed deposit is also like a term deposit, where the depositor saves a lump sum amount for a specific period. However, fixed deposits have flexible durability as compared to term deposits. The term for fixed deposits ranges from 7 days to 10 years. The rate of interest on this deposit purely relies on the period for which you have deposited the fund.
The depositor can withdraw their deposited money only at maturity. Any premature withdrawal is subject to penalties. The rate of interest for fixed deposits ranges from 4% to 7.5%. Both term deposits and fixed deposits may operate in a similar way, but their unique features set them apart and keep the FD vs term deposit debate on.
Features of Fixed Deposits
Fixed Deposits also differ from term deposits for their unique characteristics. These are:
- Fixed Deposits (FDs) are available with different investment durations, from 7 days up to 10 years, and these durations can vary between different banks.
- The interest earned on the invested sum is compounded at regular intervals, which could be on a quarterly, annual, or monthly basis.
- Senior citizens are eligible for returns that are 0.5% higher compared to those offered to regular investors.
- Upon reaching maturity, the matured amount can be reinvested for further investment.
Prerequisites of Investing in Term Deposit and Fixed Deposit
Whether you decide to go with term deposits or fixed deposits, there are some things you must consider before making your call. Here is what you must keep in mind:
● Interest rate
While investing in either of the deposits, you must assess the interest rates offered by both kinds of deposits. In fixed deposits, market fluctuations affect the rate of interest, unlike term deposits. Your rate of interest also depends on your tenure; the longer the tenure, the better the interest rates will be.
● Early withdrawal terms
The amount invested in a fixed deposit or term deposit is allowed to be withdrawn only at the time of maturity. But if you still wish to withdraw the amount, then you have to pay the penalty for making an early withdrawal. So make sure to decide on your preferred term before investing your money.
● Tax-saving options
Tax-saving deposits are one of the most advantageous options to go for when you are looking to invest in terms of fixed deposits. It’s important to check whether your chosen term or fixed deposit provides you with the benefit of a tax-saving option. The option is widely provided by many renowned banks.
● Pay-out alternatives
Before investing in term deposits and fixed deposits, you must weigh your options in pay-out. Some people prefer receiving their returns monthly, quarterly, semi-annually or annually. If you are also one of them, then you must see which one of our terms and fixed deposits may provide you with this benefit.
Difference between Term Deposit and Fixed Deposit
Now that you are well aware of what fixed and term deposits are, it might be easy to analyse the whole difference between short term deposit vs fixed deposit. Besides being regarded as closely interchangeable investment instruments, here are some aspects in which both the deposits differ:
- Investment Flexibility: While Fixed Deposits necessitate a lump-sum investment, term deposits or term deposits allow the convenience of making investments in installments.
- Investment Duration: Term deposits are characterised by their short-term nature. On the other hand, Fixed Deposits offer an opportunity for long-term investments.
- Interest Rates: Fixed-term investments only provide higher interest rates to people investing higher amounts. If you invest a low amount in FD, then you are entitled to receive low rates of interest. Term Deposits, on the other hand, yield higher rates of interest even at a minimum amount.
- Profit Margins: In terms of profit margins, a term deposit is one of the advantageous investment instruments. The reason is simple, the interest offered by the bank to the customer is generally lower than the interest amount accrued by them from their clients. However, these same margins might be lower in fixed deposits.
Conclusion
Term deposits and fixed deposits are well-known investment instruments to invest your lump sum amount for the future. While the fixed deposit is part of a term deposit, both of them still differ, giving light to short term deposit vs fixed deposit. Both the investment instrument possess the unique features mentioned above, which makes them distinct from each other. Depending on your unique requirement for investment, you can invest in any of the deposits and enhance your returns exponentially.
