Term Deposits and its Importance

Published on: Nov 18, 2023

The importance of saving and growing one’s hard-earned money is significant in today’s turbulent economic times. Depending on multiple factors like expendable budget, risk tolerance, financial security, etc., the investment patterns and options would differ for each person. Term deposits can be one of the most viable options for people looking to invest with mitigated risks and stable returns. This investment style wherein the sum of money will be kept for a certain period of fixed maturity. The depositor would not be allowed to withdraw any sum until the maturity span is over. ‘Term’ deposits are named so because the sum is kept for a particular term.

There are different types of term deposits:

• Fixed Deposit: FDs or fixed deposits operate on the policy that the amount is invested for a certain set duration. However, the duration can be flexible. The time frame for which the funds are placed would determine the rate of interest in an FD. Using this service to deposit money in bulk for a significant time would lead to higher interest rates than the traditional savings account. One can also find various types of FD like
  • auto renewal mode
  • renewal on only the maturity amount
  • renewal on only maturity amount and interest



• Recurring Deposit: Recurring deposits utilize the principle of investing a fixed sum of money at a pre-decided interval (usually, once a month). The interest is earned based on these regular investments until the period of maturity is over. The amount and tenure of a recurring deposit cannot be altered once it is locked in. It would be advisable to not withdraw the sum prematurely as it would incur a fine (penalty) in the rate of interest. Depending on different banks, government regulations, and other factors that affect the economy, the rate of interest would differ.



• Advantages of term deposits: Putting one’s monthly savings to efficient and optimum use would be possible with the help of term deposits. Different banks in the country offer various options and policies that can be chosen. Term deposits are important because:
  • The rate of interest is fixed and stable depending on the tenure of the investment, type, and amount
  • Term deposits are often considered risk-free and safe. People with a lower tolerance for financial risk can opt for this method without the stress of losing their capital
  • Term deposits are often a good stepping stone to creating an investment ladder, especially for people who are new to the field of investing and finance.
  • The low deposit amount creates less pressure per month.
  • Term deposits offer a higher interest rate and can be alluring to people who have that capital for investment.
    Knowledge and understanding regarding the types of investment opportunities in terms of term deposits that are offered by banks can be helpful in overall financial planning and the growth of money.

References:
https://www.investopedia.com/terms/t/termdeposit.asp
https://groww.in/fixed-deposits/term-deposit-vs-fixed-deposit
https://www.bankbazaar.com/fixed-deposit/term-deposit.html