Fixed deposit accounts allow account holders to deposit money for a fixed period of time. The time period can
range from 15 days to as long as five years. During this period, the bank keeps adding a certain fixed amount to the fixed deposit
as interest. The interest rates offered on fixed deposits vary between banks.
Benefits of Fixed Deposit Accounts
A fixed deposit account has the following advantages:
Various banks offer higher rates of interest to senior citizens on their fixed deposits than to regular account holders.
This makes fixed deposits a popular investment for retirement.
In most countries, tax departments allow deductions if one makes investments in fixed deposits.
A fixed deposit account yields higher returns than normal deposits, such as a savings account or a current account. A fixed
deposit usually yields interest on a quarterly basis.
Fixed deposits are considered safer than mutual funds and investment in stocks.
Bank accounts in developed markets are insured. For example, the FDIC insures all deposits in US banks.
Drawbacks of Fixed Deposit Accounts
The drawbacks of fixed deposit accounts are:
- Money invested in a fixed deposit grows slower than in investments such as stocks.
- The rate of interest offered by banks on fixed deposits is subject to change according to inflation.
If inflation rises, the interest earnings from a fixed deposit will be significantly impacted.
- The account holder is not allowed to withdraw the funds before the date of maturity.
Precautions While Investing in Fixed Deposit Accounts
Here are some precautions an investor must bear in mind while investing in fixed deposit accounts:
- If one has invested in a company’s fixed deposit account, chances are s/he will lose her or his money if
the company goes bankrupt. It is important to read the fine print. The best option is to open a fixed deposit account in an
established and reputed bank and to ensure this situation is covered by insurance.
- The amount one earns on a fixed deposit depends on whether the bank compounds interest on a quarterly or monthly basis. A
monthly scheme will yield more returns than a quarterly scheme.
- One must find out what penalty is imposed if an account holder wishes to withdraw money from a fixed deposit before the
maturity date.
- Thus, while a fixed deposit account can be a safe option, it is not as lucrative as some of the exchange traded and OTC
investment options.