What is term deposit?

What is a Term Deposit?

A term deposit is one of the ways of investing money alongside options like savings account, shares and property. A term deposit is a fixed sum of money that is invested for a fixed amount of time in return for a fixed amount of interest. Term Deposit is also known as Fixed Deposit.

It is one of the most secure options of saving or investing money as its rates are risk averse and are not subject to market fluctuations. The deposits are however locked-in till the maturity period and any premature withdrawal is subject to charges or penalties. If the investor wishes to receive the interest income before the time of maturity, they can opt for a plan which provides the interest during weekly, monthly, quarterly or yearly intervals. Term Deposits can be availed through financial institutions like banks, Non-Banking Financial Companies (NBFCs), credit unions and building societies.

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What is term deposit?

Types of term deposits:

 The various types of term deposits are listed below:

• Company fixed deposits: these are the term deposits that are invested in a financial institution for a fixed time period. The investors gain an interest income based on rate of interest dictated by the company. The deposits are unsecured and are subject to the financial position of the economy.
• Short term and long term deposits: the short term deposits ranges from 1 month to 12 months. Whereas the long term plan ranges from 3 months to 5 years. The rate of interest offered on short term deposits ranges from 4% to 5% and the long term deposits ranges from 6.5% to 8%.
• Senior citizen term deposit: this is a special term deposit plan that offers a slightly higher rate of interest to senior citizens (above 60 years of age). These deposits are further entitled to benefits like nomination and premature closing of the account.
• Cumulative and non cumulative deposits: in case of a cumulative term deposit, the individual receives a payout inclusive of interest at the end of the maturity period. A non-cumulative deposit on the other hand refers to term deposits where the individual receives regular interest payouts at fixed time intervals. An investor selects the pay-out frequency i.e. fortnightly, monthly, quarterly or yearly, while opting for a term deposit plan.
• Post office time deposits: this is a term deposit plan that is offered by the Indian postal service. These deposits can be opened either under individual account or as a joint account.
• Recurring deposit: Recurring Deposits refer to the opportunity availed through the financial institutions that enable an account holder to deposit a fixed sum of money each month for a pre-determined time period. 

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Term deposit advantages:

Listed below are the advantages of investing money in a term deposit:

• Fixed rate of interest: the rate of interest on a term deposit remains fixed. The rates of interest are pre-determined and remain fixed throughout the term and are not subject to market fluctuations.
• Fixed tenure: the investor can pre-determine the tenure of the term deposit plan offered by the financial institute. So, the money remains with the bank or the finance company over a fixed period of time and continues to earn interest. The term usually ranges from 7 days to 5 years.
• No extra charges: The investor pays lump sum money at once while investing in term deposit. There is no monthly premium payment or monthly transaction fees required to be paid for investing in term deposits.
• Safe investment option: it is one of the safest investment options for investors. A term plan carries almost no risk and is resistant towards the fluctuating economy and market risk.
• Simple to understand: Unlike many financial products, term deposits are simple to understand. They are simple to operate: once you’ve set up a term deposit, you don’t need to worry about it until it’s about to expire.

Term deposit rates:

The interest that is paid by the financial institutes and banks on term deposits differs from one institute to the other. The interest rate offered for term deposit plans ranges from 5% to 8%. The latest data indicates that some banks like IDBI bank, Kotak Mahindra and Yes Bank provides better interest rates on term plans. Some lenders also offer better interest rates on senior citizen schemes than normal term plans.

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Special term deposit:

Term deposit is a basic time deposit scheme in which an individual can deposit funds for a specified time period and earn higher returns than savings bank account. Special Term Deposits have special term periods like 333 days or 555 days. Special Term Deposits offer a better interest rate which would be higher than regular FDs. STDR stands for Special Term Deposit.  The interest on STDR deposit doesn’t get paid each month or year, rather the interest is credited at end of maturity period.

In STDR the investor gets the additional benefits of interest on interest. The rate of return in case of STDR is a little higher because of the compounding interest. Hence it can be a little more beneficial for the investor.

Term deposit disadvantages:

• Lower returns: term plan generally offers lower interest rates than mutual funds and equities.
• Lock in period: there is no flexibility to access the fund deposited in term plan. The funds invested in these deposits can only be withdrawn at maturity.
• Taxation on interest: The interests gained on these deposits are liable to taxes as tax deducted at source (TDS).
• Penalty on premature withdrawal: these deposits come with a pre-determined lock in period. A premature withdrawal is liable to penalty payment that is fixed by the lending institution.

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