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What is a Term Deposit?

The terms “fixed deposit” and “term deposit” are often used interchangeably. However, there is one primary difference between the two which is that a fixed deposit is a type of term deposit that has a fixed interest rate. On the other hand, a term deposit can have a fixed or floating interest rate.

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Term Deposit

What is a Term Deposit, Its Benefits, Features and Should You Invest

What is Term Deposit
November 30, 2023

 

A term deposit, also known as a fixed deposit or time deposit, is a type of savings account that offers a fixed interest rate for a predetermined period of time which can range from some weeks to several years. This means that you agree to lock up your money for a specified amount of time, in exchange for a higher interest rate than you would earn on a regular savings account. Based on the type of term deposit you choose; you will receive the interest payment periodically or when your investment term ends.

Simply put, term deposits are a safe and secure way to earn a guaranteed return on your money.

What is Term Deposit?

The first rule of a term deposit is that unlike a savings account, you cannot access the funds in your term deposit account whenever you want. It is held at a financial institution like a bank, credit union, or building society, and the money in a term deposit is locked up for a fixed period of time. In return for locking up their money, depositors receive a fixed interest rate. The interest rate on a term deposit is higher than the interest rate on a regular savings account. During this time, the depositors cannot withdraw their money. However, in case the depositor opts to withdraw the funds before the end of the maturity period, the financial institution such as a bank will levy a penalty depending on the type of term deposit you have chosen.

Term Deposit - Key Features

1. Fixed interest rate:

Term deposits offer a fixed rate of interest over the life of the investment made by the depositor.

2. Fixed term:

Term deposits allow the depositor to lock in your money for a certain amount of time.

3. Penalty for early withdrawal:

If the depositor wishes to withdraw the money before the term ends, a penalty will be charged by the bank.

4. Safe and secure investment:

A term deposit is a safe way to earn interest on your money since there is no chance of capital erosion. They are relatively risk-free because they are backed by the Reserve Bank of India, which has made deposit insurance compulsory for all banks. Term deposits up to Rs one lakh are covered by the Deposit Insurance and Credit Guarantee Corporation scheme.

5. Low-risk/Conservative investors:

Term deposits are perfect for conservative and low-risk investors who want guaranteed returns on their investments.

Term Deposit - Benefits

Term deposits offer a range of benefits such as assured reward, predictable payments, effortless investment, customizable tenure, secure investments, low minimum amount availability, return of entire principal amount. It is ideal for low-risk investors. Let’s delve into each benefit and understand why it makes sense to open a term deposit.

1. Assured reward:

Unlike volatile investments that can go south unexpectedly, term deposits offer a level of comfort and certainty. The interest rate is pre-decided which further protects you from market fluctuations and you know exactly how much your investment will grow.

2. Predictable payments:

Term deposits offer a reliable source of timely income; the frequency of which can be chosen, based on the needs of the depositor. The fixed interest rate guarantees a consistent stream of income.

3. Effortless investment:

Opening a term deposit is a quick and easy process. With just a few clicks or a short visit to your bank, a term deposit can be secured in a matter of minutes. No extensive financial knowledge is required which makes term deposits an accessible option for all.

4. Customizable tenure:

Term deposits offer flexibility in duration which allows depositors to tailor their investment based on their financial goals. Whether it is a short-term objective or long-time goal, there is a term deposit plan for everyone.

5. Secure investments:

Perfect for risk-free investments, term deposits are protected by the Deposit Guarantee Fund (DGF) which safeguards your principal amount up to a certain limit. This added layer of protection provides peace of mind to the depositor who knows that their investment is safe and sound.

6. Ideal for conservative investors:

Term deposits are risk-free and a good deal for investors who prioritise stability over high returns. They offer a secure way to grow your savings without the uncertainty of market volatility.

7. Low minimum amount availability:

A depositor can open a term deposit with as low an amount as Rs 1000 with most banks.

8. Entire principal amount returned:

The bank, or financial institution, returns the entire principal amount to the depositor at the end of the investment tenure.

Types of Term Deposits

There are two main types of term deposits: Fixed Deposits and Recurring Deposits.

Fixed Deposit

Fixed deposits have a fixed interest rate and a fixed term. However, the duration of a fixed deposit is flexible. It can range from a week to many years. The rate of interest of a fixed deposit solely depends on the amount of time the funds are locked in for. The depositor cannot access these funds without paying a penalty in return to the bank in case of a premature withdrawal.

Then there are tax saving fixed deposits, senior citizens’ fixed deposits, corporate and other fixed deposits, all of which are essentially fixed deposits with variations of lock-in periods, rates of interest and eligibility.

Recurring Deposit

A Recurring Deposit is when a depositor invests money at fixed intervals. Usually, this takes place once a month. The investments can earn interest till the maturity period. It is almost like opening several different Fixed Deposit accounts with the same maturity period for all of them. However, once the term is fixed for a Recurring Deposit, it cannot be changed. Just like Fixed Deposits, premature withdrawal of the funds will lead to a penalty levied by the bank. The minimum amount to invest in a recurring deposit is Rs 100 and this can be increased in multiples of hundred. The minimum amount of time for a Recurring Deposit is six months and the maximum is ten years.

Fixed Deposit vs Term Deposit

The terms “fixed deposit” and “term deposit” are often used interchangeably. However, there is one primary difference between the two which is that a fixed deposit is a type of term deposit that has a fixed interest rate. On the other hand, a term deposit can have a fixed or floating interest rate.

A fixed deposit is maintained for a longer period of time which further earns the depositor a higher rate of interest. A recurring deposit takes a certain amount of money and invests it every interval. However, it is ideal for those who want to invest a fixed amount of money every month. It all depends on the financial goals and aspirations of the depositor.

How to invest in a Term Deposit

Investing in a term deposit is a smooth process. Firstly, you will need to open an account with a financial organisation such as a bank. Then you have to decide how much money you want to invest and for how long you want to lock it up. Once your terms and conditions are decided, you will be easily able to open your term deposit account.

FAQs about Term Deposit

1. What is a term deposit account?

A term deposit account is a type of savings account that offers a fixed interest rate for a predetermined period of time.

2. Is term deposit the same as FD?

Yes, term deposit and FD are the same thing. There is one primary difference between the two which is that a fixed deposit is a type of term deposit that has a fixed interest rate. On the other hand, a term deposit can have a fixed or floating interest rate.

3. What is a 1-month term deposit?

A 1-month term deposit is a type of term deposit that has a term of one month.

4. What are the examples of term deposits?

Examples of term deposits include fixed deposits, floating deposits, and recurring deposits.

5. Can I withdraw from a term deposit?

You can withdraw from a term deposit before the maturity date, but you will likely have to pay a penalty.

6. How is a term deposit better than a savings account?

Term deposits offer a higher interest rate than savings accounts. However, they also lock up your money for a fixed period of time.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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