Knowing the Features, Benefits, & Downsides of Fixed Deposits

how does fixed deposit work?

Knowing how fixed deposits work is crucial for anyone thinking about investing their money wisely. Fixed deposits, sometimes called term deposits, are a favorite among investors who want steady and guaranteed returns on their savings. But what exactly is a fixed deposit, and how does it work?

What is a fixed deposit?

A fixed deposit, also called a term deposit in the US, is a banking deal where you put a certain amount of money in for a set time at a fixed interest rate. Unlike regular savings accounts, fixed deposits give you higher interest rates but ask you to leave the money alone for the whole time.

People like fixed deposits because they give steady and sure returns on savings. They’re seen as safe bet investments because the interest rates stay the same, and many countries protect them with government insurance schemes.

How does it work?

Opening a fixed deposit account is simple. First, you decide how much money to deposit and for how long. Then, the bank calculates the interest rate based on your choices, and it stays the same during the whole period.

Once you’ve set up the fixed deposit, you can’t take out the money until the end date without paying extra fees. While your money is in there, it earns interest at a rate that’s usually higher than what regular savings accounts offer. When the time’s up, you get back the original amount you deposited plus all the interest it earned. Some banks might let you put it into another fixed deposit or move it to a savings account.

Fixed deposits are a safe way to save money and ensure it grows. They’re good for people who don’t want to take big risks and want to keep their money safe while earning a bit more.

What are the features of a fixed deposit?

Fixed deposits have some cool features that make them a good choice for lots of people:

  1. Fixed Interest Rates: With fixed deposits, the interest rate stays the same for the whole time you have your money in there. This means you’ll always know how much you’ll get back.
  2. Flexible Time Choices: You can pick how long you want to keep your money in a fixed deposit, whether it’s just a few months or even a few years. This helps you match your savings with your goals and when you might need the money.
  3. Low Minimum Deposit: You don’t need a lot of money to start a fixed deposit. Many banks let you start with just a little bit, so it’s open to everyone.
  4. Safety: Fixed deposits are safe because they’re not risky investments. In lots of places, the government makes sure your money is safe up to a certain amount.
  5. Regular Payments: You can choose to get paid interest regularly, like every month or every few months. This can be handy if you want to have a steady income, especially if you’re retired or need money regularly.

The benefits of fixed deposit

Fixed deposits have some great perks that make them a hit with investors: 

  • Guaranteed Returns: With fixed deposits, you know exactly how much you’ll get back. The interest rate doesn’t change, so there’s no guessing about your earnings.
  • Safety and Security: These investments are super safe. Even if the market goes up and down, your money stays safe and sound.
  • Higher Interest Rates: Fixed deposits usually pay out more interest than regular savings accounts. That means you can make more money on the cash you’re not using right away.
  • Flexible Time Choices: You can pick how long you want to stash your cash in a fixed deposit. Whether you need your money back soon or you’re saving for the long haul, there’s an option for you.
  • Tax Benefits: In some places, fixed deposits come with tax perks. You might get a break on the taxes you owe, which means more money in your pocket.

The downsides of fixed deposits

Fixed deposits have a few drawbacks you should know about:

  • Limited Access: Once you put your money into a fixed deposit, it’s stuck there until the term ends. If you need cash before that, you might face penalties, which can eat into your earnings.
  • Inflation Risk: If the interest rate on your fixed deposit doesn’t keep up with inflation, your money might not grow as much as you’d like. That means your purchasing power could decrease over time.
  • Missing Out on Better Returns: While fixed deposits are safe, they often don’t offer as much return as riskier investments like stocks or mutual funds. So, you might miss out on higher earnings by playing it safe with fixed deposits.

How does fixed deposit compare to other deposit accounts?

Fixed deposits have some clear advantages over other types of deposit accounts, like savings or current accounts: 

  • Better Returns: Fixed deposits usually give you higher interest rates than savings accounts. While savings accounts are easy to dip into, they often offer lower interest rates, making fixed deposits a smarter choice if you want to grow your money faster.
  • Guaranteed Returns: Unlike savings accounts, where interest rates can go up and down, fixed deposits promise you a set return over a fixed period. This reliability means you can count on a certain amount of money back, making fixed deposits a top pick for those who like predictability.
  • Stability and Safety: Fixed deposits offer stability and safety for your money. With fixed interest rates and a set time frame, you’re shielded from ups and downs in the market, which is great for cautious investors who want to keep their money safe.
  • Long-Term Goals: Fixed deposits work well for long-term savings plans, like saving for retirement or buying a house. The fixed period helps you stick to your savings plan and reach your big financial goals.
  • Tax Perks: In some places, fixed deposits come with tax benefits, like tax breaks on the interest you earn or even tax-free earnings on certain types of deposits. These tax perks can boost your overall earnings from your investment, making fixed deposits a smart choice for tax-savvy savers.

Is it a good idea to put your money in fixed deposits?

Whether fixed deposits are right for you depends on a few things: 

  • Your Goals: If you want to keep your money safe, earn steady returns, and avoid risk, fixed deposits could be perfect. They’re a safe bet, especially if you’re saving up for big things over the long haul.
  • Your Risk Tolerance: If you’re not into taking big risks with your money, fixed deposits might suit you. They’re pretty safe and predictable, unlike other investments that can go up and down with the market.
  • How Long You Want to Invest: Fixed deposits work well if you’re in it for the long haul and don’t mind locking away your cash for a set period. But if you need quick access to your money or have short-term goals, other types of accounts might be better.
  • Spreading Out Your Money: While fixed deposits are safe, it’s smart to spread your money around to manage risk. Relying only on fixed deposits might keep your money safe but could mean missing out on bigger returns from other investments.

Know what a fixed deposit is

Fixed deposits are a safe way to save and make sure you get back a set amount with added interest. They’re great because you know exactly how much you’ll earn and can pick how long you want to invest. With fixed deposits, your money is secure and you can grow your savings without worrying too much.


Scroll to Top