A term deposit is an investment in cash held at a financial organization. You invest your money for a fixed interest rate over a fixed period of time, also called term. Term deposits may be invested in any financial institution like banks, union credits, etc. When you deposit the money, you are to understand that the money will be there for the agreed period. This period may range from 1 month to even 5 years. The interest rate is ensured not to change during that period of time. Normally, you can only withdraw this money on completion of the fixed term. If you withdraw it earlier, a percentage of it is to be paid as penalty to the institution.
Term deposit are preferred by investors who prefer security of capital and a fixed return as opposed to fluctuating investment options like the share market. Investors also use term deposits as a portion of their total investment in combination with other forms of investment. Term deposits are preferable when you have a planned expenditure up ahead in a fixed period of time. However, they may also be used as emergency funds in certain circumstances.
• Emergency funds are usually parked in savings account, from where money may be withdrawn easily. Term deposits allow withdrawal after the term is over, while a penalty has to be paid in case withdrawal is done earlier. In case of a long term deposit, the penalty is proportionately less, allowing you access to a substantial portion of your money even after paying the penalty.
• Some banks have a ‘sweep in’ facility, where you deposit money in a savings account, and when the total balance reaches over a certain amount, a fixed portion of it is transferred to a term deposit. If money is withdrawn, it is done by breaking the deposit. The advantage you get is that interest rate for a savings account is usually low, while interest rates for term deposits are high. So the money you get in return is high.
• Short-term deposits of one year serve best as rainy day funds as the money takes less time to mature but still increases in amount. The short period gives a better chance of you being able to withdraw the money without penalty in case of an emergency.
• Debt funds are short-term deposits that offer variable interest rates according to the market, but the term of deposit is very small. Also, withdrawal of money before the fund matures usually does not have a penalty.
Term deposit are preferred by investors who prefer security of capital and a fixed return as opposed to fluctuating investment options like the share market. Investors also use term deposits as a portion of their total investment in combination with other forms of investment. Term deposits are preferable when you have a planned expenditure up ahead in a fixed period of time. However, they may also be used as emergency funds in certain circumstances.
• Emergency funds are usually parked in savings account, from where money may be withdrawn easily. Term deposits allow withdrawal after the term is over, while a penalty has to be paid in case withdrawal is done earlier. In case of a long term deposit, the penalty is proportionately less, allowing you access to a substantial portion of your money even after paying the penalty.
• Some banks have a ‘sweep in’ facility, where you deposit money in a savings account, and when the total balance reaches over a certain amount, a fixed portion of it is transferred to a term deposit. If money is withdrawn, it is done by breaking the deposit. The advantage you get is that interest rate for a savings account is usually low, while interest rates for term deposits are high. So the money you get in return is high.
• Short-term deposits of one year serve best as rainy day funds as the money takes less time to mature but still increases in amount. The short period gives a better chance of you being able to withdraw the money without penalty in case of an emergency.
• Debt funds are short-term deposits that offer variable interest rates according to the market, but the term of deposit is very small. Also, withdrawal of money before the fund matures usually does not have a penalty.
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