WHY YOU NEED FIXED DEPOSIT

In my last write up, I made comparison between Fixed Deposit and Treasury bills. Though I am yet to receive any comment or question on the post but today I want to explain further why you need fixed deposit account.

 Not too many bank customers have a fixed deposit account. As a matter of fact many people only heard of the fixed deposit account when they were in secondary school. Study have shown that over 75 percent of bank customers operate savings and current accounts, while only about 25 percent do fixed deposit. This implies that so many bank customers are missing out on the benefits of fixed deposit accounts. This is because a fixed deposit account is more of an investment than just running a bank account.

To start with, a fixed deposit account is a financial instrument where an investor gives a certain sum of money to a bank or financial institution and the entity pays interest for the duration of the deposit. A fixed deposit account is an account in which the money is deposited in the beginning of the period and interest is accrued on it, credited and redeemed after the completion of the said period.

It is similar to a savings account. It is a very simple account in which the account holder needs to only invest money one time and get returns for what the account has been opened for. The rate of interest paid varies depending on the amount and tenure. Investors, especially conservative investors, prefer to open fixed deposit accounts as it is a safe investment option and it can be opened easily and quickly.

Encourage savings habit

Fixed deposit accounts require you to keep an amount for a certain period to accumulate the agree interest amount. This encourages a savings habit by an individual, as he will not be tempted to spend the money and find a way to manage his finance more efficiently.

Higher rate of return

The interest rates offers on fixed deposits are higher than that on savings accounts. It is also a safe form of investment where returns are guaranteed.

Guaranteed returns

Unlike investment in stock market or commodity market, fixed deposit are not risky investments as they do not depend on fluctuating market rates. Investors can rest assured that their investments are safe and they will be getting back a guaranteed amount at the end of the investment.

It can be withdrawn easily.

The amount that invested in a fixed deposit account can be withdrawn at any time for small penalty. The investor may have a financial emergency to meet like marriages, illness or when his business is in a loss. The penalty is less than that of selling stocks or real estate as the asset cannot be sold easily because of its high value and if you are in a distressed situation, you will sell it for a much lower rate. Whereas, fixed deposit can be withdrawn at any time and all you lose is a certain interest income.

Flexible in nature

Fixed deposit accounts can be taking for a tenure of one month, three months, six months , one year, two years or even ten years based on your requirement and for whatever amount that you can invest. Fixed deposits can be invested for tenure of your choice. If you have planned for a big event in five years, then you can have a fixed deposit kept for five years to meet your financial needs. You can have various fixed deposits accounts to save for different goals. Some banks provide flexible fixed deposit schemes.

Flexible interest rate pay-outs

Interest rate can be paid at different interval depending on the term you choose.

Disadvantages of fixed deposit accounts

·         Inflation rate of a country may affect return on fixed deposit account. As the price of products are increasing in the market, the inflation rate is also increasing, which does not support the increase in higher interest rates.

·         In most countries, the taxation on fixed account is done as normal taxation and no other benefits are allowed.

·         The benefit of diversification is not available as all the money is invested in one account only, ruling out opportunity to invest in stock market or other instruments.