A penny saved is a penny earned. This wise saying reminds us that saving money is just as important as making it. When it comes to your finances, planning for the future is key. One way to grow your savings is by investing your hard-earned money.
Term deposits and fixed deposits (FDs) are popular options offered by banks and other non-banking institutions. They allow you to invest a lump sum of money for a set period and earn interest on your investment. While they seem similar, there are some key differences between them. Understanding these differences is crucial to help you decide where to put your savings.
Terms Deposits
Term deposits, as the name suggests, are deposits held for a specific term. They typically offer shorter maturity periods ranging from a week to five years. This flexibility in terms of tenure can be advantageous for investors seeking to lock in their funds for a shorter duration. Term deposits often have lower minimum deposit requirements (compared to FDs) and offer guaranteed returns at fixed interest rates.
Key Features of Term Deposits
- Term deposits come with a predetermined interest rate. This provides clarity regarding your returns.
- Term deposits are considered safe and secure investments since they are protected by entities like the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA), offering you peace of mind.
- You can strategically diversify your investments by choosing multiple term deposits with different maturity dates, creating an “investment ladder” to ensure a steady flow of income.
- Term deposits often have low minimum deposit requirements, which makes them accessible to a wider range of investors.
- Similar to FDs, some term deposits may offer higher interest rates for larger investments.
- Term deposits offer more flexibility compared to fixed deposits. Some plans allow you to invest in instalments, making them suitable for building savings gradually.
Benefits of Term Deposits
Here are some of the benefits term deposits offer:
- Guaranteed Returns:
The interest rates for term deposits are predetermined, so investors know the exact returns they will receive upon maturity.
- Lower Risk:
Since the returns on term deposits are fixed, they are considered a safer investment option compared to other savings alternatives.
- Flexible Maturity Dates:
You can choose the duration for which you want to invest your money in term deposits, offering flexibility in the investment period.
Fixed Deposits
A fixed deposit is a type of deposit account where you invest a lump sum amount for a fixed period, typically ranging from 7 days to 10 years. Similar to term deposits, you earn a predetermined interest rate on your investment. However, fixed deposits generally offer a longer lock-in period and may have stricter withdrawal terms.
Key Features of Fixed Deposits
- Fixed deposit returns remain unaffected by market fluctuations, providing you with consistent returns over the deposit period.
- Fixed deposits are attractive to risk-averse investors looking to preserve their capital because they offer minimal risk of principal loss.
- You can easily renew your FD upon maturity to continue earning interest.
- You can use your fixed deposits as collateral to obtain loans. This allows you to access liquidity without making premature withdrawals.
- With FD, you can opt for periodic interest payouts to manage monthly expenses like bills, rent, and more.
- Senior citizens often enjoy preferential interest rates on fixed deposits, making them an attractive option for retirees.
Benefits of Fixed Deposits
- Fixed Returns:
Fixed deposits offer guaranteed returns on your investments. Your capital remains secure, and you earn higher returns than a savings account.
- Compounding:
With fixed deposits, you can earn interest and benefit from the faster growth of your funds through compounding.
- Liquidity:
While you can withdraw funds from your fixed deposit account before maturity, doing so may result in a penalty or a loss of some interest. However, this feature provides liquidity and access to funds during emergencies.
- Ease of Investment:
Fixed deposits are easy to set up, whether online or offline. You can also invest via mobile banking or net banking.
- Higher Returns for Senior Citizens:
Fixed deposits offer higher returns to senior citizens, ensuring their investments provide adequate support during retirement.
Term Deposit vs. Fixed Deposit: Key Differences
Here’s a table to summarise the difference between a term deposit vs. fixed deposit:
| Factors | Fixed Deposit | Term Deposit |
| Flexibility | Lower – requires lump sum investment | Higher – may allow instalments |
| Interest Rate | Generally higher | Can be fixed or variable |
| Tenure | Longer – typically 1 week to 10 years | Shorter – typically 1 week to 5 years |
| Profit Margin | May offer higher profit depending on the chosen term | Potentially higher returns |
| Penalty on Early Withdrawal | Applicable | Applicable |
| Suitable Investors | Ideal for mid-term to long-term goals | Best for short-term goals |
Term Deposit vs. Fixed Deposit: Choosing the Right Option
The best choice between a term deposit and a fixed deposit depends on your individual financial goals and risk tolerance. You can consider the following factors when making your choice:
- Investment horizon:
Determine how long you can commit your funds. If you need your money sooner, a term deposit with a shorter tenure might be preferable.
- Interest rate:
Compare the current interest rates offered by various institutions for both term deposits and fixed deposits. This will help you maximise your returns.
- Flexibility:
Do you need access to your funds periodically? Fixed deposits might be more suitable if you require periodic interest payouts or the option to take a loan against the deposit.
- Investment amount:
Check the minimum deposit requirements for both options. Term deposits may be more accessible with lower minimums.
Carefully evaluate these factors and choose the investment option that best meets your financial needs and goals.
