This article briefly describes what a term deposit is, its advantages and disadvantages. This low-risk, moderate return investment vehicle can also act as a savings toll and a source of income for the patient investor. This article provides you with a guide to term deposits.
How it works
Definition A term deposit is a cash payment made to a bank by an investor who cannot withdraw the amount until the end of the term. This type of account contrasts with the at-call account that allows you to withdraw cash at any time. Investments Term deposits usually serve as investments because the bank pays a fixed pre-determined interest rate on the amount deposited. This rate is usually above the market rates for savings accounts and serves to entice investors who may have some surplus cash. The bank in turn invests the cash and pays the interest from its profits. Once the term is over, the account holder can withdraw the cash or hold it for another term to generate more returns.
Offer investor safe returns Term deposits have a number of benefits and drawbacks. On the upside, they are completely risk-free and offer an investor safe returns no matter what happens to the economy or the institution. An investor always gets their returns from term deposits. Higher returns Secondly, term deposits' interest rates are usually above savings account rates. This means that the account holder gets the benefits of a savings account with the added advantage of higher returns. In addition, the interest rates for term deposits never vary. They remain the same throughout the term of the investment. Accumulation of money Thirdly, term deposits help savers to accumulate their money. They are a good investment vehicle for those who have extra money and do not want to spend it. Extra-income stream Lastly, they can also function as an extra-income stream. This is because the bank gives the investor the option of monthly interest payments. This means that once the deposit earns returns, the bank pays the investor interest every month as an income.
Penalty charge and low rate of return However, term deposits also have their disadvantages. Firstly, you cannot access your money during the term. In the case of an emergency, you can access the cash but a penalty charge may apply due to the breach. At the same time, term deposits have a lower rate of return than other products such as online savings accounts that have a similar level of safety but are more flexible. In summary Term deposits are a safe way to store money especially for those who like low-risk investments.