What is a Term Deposit? Are FD and Term Deposit the Same?: A couch in America and a sofa in Europe. The object is the same, but the different terminologies are the headscratchers. Why not save us all the excess amount of trouble and just keep it standard? But that is not practically possible, is it?
It is not like we have a team of experts using binomial nomenclature to make things easier. But, the same problem arises when we say term deposits, fixed deposits, and time deposits. All of these are similar, but little do we know that they play to similarities. But, there is one small change between the two of them that could most times be overlooked (because that’s how small it is).
Term Deposit Vs. Fixed Deposit – How are they Different?
Term deposits and time deposits are pretty much the same, but people always almost get confused with them. This is just because the different groups of people use this in different instances. America might term it differently, while India another way. This causes chaos in the financial field.
Most importantly, the chaos is because we do not want to invest that we are not sure about.
So, that minute change between the two is – when it is below six months, let’s say a month or three – it is known as a term deposit, and when it is more than six months, it is mostly called a fixed deposit. Though this is very uncommon, it is a little something that you need to know.
So, are you ready to know everything about a term deposit? Let’s get started.
How Does a Term Deposit Work?
A term deposit (as the word states) is for a fixed term; it could be months to years. For an investor who has a lump sum amount of money can choose to invest their lump sum into a term deposit for a fixed term and earn some amount of return on them. Let’s take an actual example, for instance.
Rahul, who sold his old car, now has Rs. 4,00,000 with him from the sale. He wants to keep this money or somehow invest it somewhere safe so he can add it up to buy a new car in four more years. So, he can’t afford to take any risks with this money, and he decides to invest it in a term deposit.
He finds the fixed deposit rate for the Bank of Maharashtra is 4.5% as of 2022. So, he puts his four lakhs in the term deposit of the bank, and after four years, his maturity amount is ₹486417. This means he has earned an interest of ₹86417.
This is exactly how a term deposit would work, and you will be leaving the money in the account for the money to work for you, and not the other way around.
What are the Major Characteristics of a Term Deposit?
A term deposit has the following features in line, and if you wish to invest in a term deposit, that will mean you are investing in a scheme that has the following attributes in store for you:
- a) It is for a fixed period; by this, you will not be withdrawing your money in between, and it will help you grow the habit of saving money instead of spending it. You also will not unnecessarily spend the money, and a term deposit can only be withdrawn when there is an emergency, and also with some amount of penalty along with it.
- b) It has higher interest rates than a savings or a regular account, and it will give the account holder a higher turnover than just letting his money sit idle in a normal account with low-interest rates.
- c) If you are the account holder of a term deposit, it is very important that you know all of the term deposits have some amount of tax benefits along with them. Through the investor’s favorite section (that is, section 80C), you can also get tax benefits of up to 1.5 lakhs over your investment in a term deposit.
- d) It can also be used by low-risk or no-risk investors. This means the investors who have a low risk or no risk appetite will be scared to invest in any kind of investment tool, and it will scare them to their wits to lose any amount of money. This is a reasonable factor. If a sum of money has been lent, needs to be paid, or is used for a particular reason, it cannot be lost or spent. That is the reason we say they need to take a safer option. It is a much safer option since no one can lose money through a term deposit.
- e) There will always be assured returns. If you choose a bank that offers you 8% of interest and you choose to stay invested for five years, you will have to know that this rate will not go down even if there is a financial crisis or the market falls. What was said will be given to you at any cost.
- f) You will have insurance coverage. According to the law, if your investment is more than five lakhs, then you can get insurance coverage. This means that even when the market does go down or the country is facing a financial crisis, the money will be returned to you with the interest rates that were already determined.
Investors can have a healthy portfolio with an investment that has higher security than any other. Sure, investing in stocks and other market-related funds could be fun to do, with massive rewards, but they also bring along a lot of risks. This is not the case with a term deposit, and you will get to enjoy a 100% security aspect, with returns that will always be guaranteed. But, there is only one thing that you will always have to keep in your mind, and that is – to make sure you do a lot of research before you finally end up putting your money in an FD.