How Does Fixed Deposits Work

Fixed deposits are considered one of the safest investment portfolios offered by banks. They pay higher than money market or savings account without the attendant risks. To invest in such a secure portfolio the company or individual will have to deposit the money for an agreed duration.

The banks are able to pay high premium because they have time specific access to the funds and are able to use them unhindered. It is possible to get the funds un-locked early however this will attract sever penalties and charges.

How Does Fixed Deposits Work

Fixed deposit are time based deposits that attract higher interest than regular saving deposits. In return for higher interests the depositor locks the funds in the bank for a specified period agreed by both parties. The party promises to keep the funds in the bank for a specified period. Fixed deposit tenors usually run from six months, eighteen months, one year, two years or five years. The longer the duration the higher the interest rate it attracts.

•         Time based

•         Attract higher interest

•         Funds are locked

Why Consider Fixed Deposit

The main reason to consider fixed deposits is higher rates. The bank agrees to pay higher rates due to the company or individuals promise to keep the funds for a specified period.

As stated earlier the interest is higher than regular saving deposit accounts. Another advantage is higher annual percentage yield on the funds deposited. Banks can offer this higher rates because they use the funds long term in other investments or long term loans.

•         Higher interest rates

•         Higher annual percentage yield
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Term Option

Fixed deposits attract term options on how long the funds are kept. The depositor cannot withdraw the funds on short notice and is encourage to run the full term.

The time period the funds are kept is referred to as term. Common term are six months, twelve months, eighteen months and sixty months.

Long Term

The longer the term the better prospects for interest. Longer terms generally attract higher interest than shorter term. Although longer term are not entirely better the terms and conditions should be properly understood.

Maturity Date

All fixed deposits have a maturity date when the investment is credited to the investor. At the end of the fixed deposit term the deposit is said to mature. The bank notifies the depositor as the fixed deposit term is about to expire.

The bank provides several options for the depositor. The depositor could consider the options or opt out of the fixed deposit. If the investor decides to do nothing the bank will automatically re-invest the said amount in another term similar to initial term.

If the fixed deposit was for one year the bank will re-activate another one year term on the deposit. The problem with this is the amount of interest may vary from previous agreement.

The interest could mark-up or down based on the banks portfolio. There is no guarantee that the same rate offered by the bank stands. It is important to let your bank know your intentions before the term ends.
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Things to Consider at End of Fixed Deposit

The fixed deposit owner has a few options at end of term. The company or individual could re-invest in another fixed deposit or withdraw the money into a savings account. They can consider a shorter or longer term or re-invest.

•         Re-invest funds

•         Withdraw

•         Consider shorter deposits

How to use Fixed Deposit

To use a fixed deposit the person needs to first contact the bank. There are two options online banks or brick and mortar banks.

You need to call their customer service or visit the bank branch. Make sure you conduct due diligence and investigate the bank before depositing your money.

Things to Ask

Ask the bank about different types of fixed deposit. Find out about early withdrawals, penalties and alternative fixed deposit products. Find the one that fits your needs with more features and flexibility.

•         Different types of fixed deposits

•         Penalty on early withdrawal

•         Alternative fixed deposits

•         flexibility

Strategies of using Fixed Deposits

Long term fixed deposits seem more attractive because of high interest rate. However they attract huge penalties if the deposit does not run the full term. Make sure you determine the right fixed deposit before investing.

Long term fixed deposit locks your funds for extended periods without access to the depositor. If you are ready to lock your funds for such extended period then long term is your best bet.

Sometimes an individual could buy a fixed deposit when the interest are low and is stock with low paying fixed deposit. A good strategy is to use short term deposits and re-invest when interest rates increase. It is important to use fixed deposits that offer flexibility.

Another technique is the ladder system to increase and optimize fixed deposit. An investor could take different fixed deposits with different terms to guarantee regular money at internals.