Investment in Term Deposits

November 17, 2008 by  
Filed under Investments

Term Deposit means investing your money in a Bank or any financial Institution for a specified period of time to receive a fixed rate of interest on maturity of the deposit period. Term Deposit is also known as Time Deposit, Fixed Deposit or CD (Certificate of Deposit). A term deposit usually offers a higher rate of interest than a Savings Account. Term Deposits are suitable for Individuals with low-risk profile as the return is guaranteed and also due to the fact that it can be insured. The Investor can be confident that his money is safe and secured in the Bank.

 

When you invest in Term Deposits you do receive a “Certificate of Deposit” as a proof for the Investment. The investment period in Term deposit is usually 3 months, 6 months, 1 year, 3 years, 5 years etc. The amount of interest is payable monthly, bi-annually or annually based on the Term deposit conditions. Some Banks may offer cumulative plan for long-term investments where your accrued interest is re-invested along with the principal amount for subsequent years. It is also possible to pledge the Certificate of Deposit for money in times of financial crisis.

 

The interest rates offered by Bank may be variable depending on the economic conditions. For instance when the liquidity is low the Banks may attract investors by offering High Interest rates for deposits. The Banks lend the money received from Term depositors to borrowers in the form of Personal Loan, Educational Loan, Auto Loan or Home Loan etc. The Bank makes it profit by charging a higher interest rate for borrowers than the one promised to the Term depositors. However the Bank cannot offer 100% of the money to lenders. It has to follow certain policies laid out by the Central Bank from time to time.

 

Advantages of Term Deposits

Investing your money as Term Deposit in Bank is safe and secured. It offers a guaranteed rate of interest upon maturity of your Deposit. It helps to meet your future expenses or fulfill your wish lists (home, car etc.). Unlike the close-ended mutual funds where you cannot withdraw your money for a specified time, it is possible to withdraw the deposited money by paying a penalty fee (premature withdrawal). Some Term Deposits usually the long term plans offer Tax benefits to the investors. You can save your hard earned money and at the same time reduce your tax burden.

 

Disadvantages of Term Deposits

The returns in Term deposits are lower while compared to other types of investment plans like mutual funds or stocks. Based on your local laws you may have to pay tax for interest earned through Term Deposits. There is a fine for pre-mature withdrawal of Term Deposits. Some Banks offer “auto-renewal” facility on Term Deposits and reserve the right to renew the deposits for further time without informing you (at the time of maturity) as you may have authorized to do so while depositing the money. As your funds are locked in for a specified period of time you may not be able to utilize your money at the time of need.

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