Time Deposit Basics
In simple terms, a time deposit account is an investment option paying you a higher rate of interest than a savings account. You get that higher rate of interest in return for putting your money in a locked account for a fixed period of time. This fixed lock in period can vary according to the term you choose and the amount you want to invest, the interest rate you earn can vary as well.
Even though they seem very attractive, fixed deposit accounts may not be suitable for everyone. Continue reading to find out about the three main disadvantages of investing in fixed deposits:
No Flexible Access To Your Funds
As your money is locked in with the bank, mostly for a couple of months, or sometimes even years, you don’t have the flexibility of a standard savings account.
If you want to make an early withdrawal from your fixed deposit account before the fixed maturity date, you will have to pay a fee, typically in the form of reduced interest or penalty fees
Low Investment Returns
Time deposits tend to pay a higher interest than a regular savings account. But because time deposits qualify as low risk investments their return potential is limited as compared to other investments (e.g. property, bonds, shares etc).
Whereas time deposits provide you high protection against uncertainty, they only offer poor protection against inflation. Consider your time deposit interest rate is at 0.6%, and the current inflation rate is at 3.8%, then the value of your money has effectively decreased by 3.2% (i.e. 3.8% – 0.6% = 3.2%).
It Is Not A Sexy Investment
Unlike other risky and more exotic investments, Time deposits are safe and boring (not a bad thing for everyone!). However, some people might not appreciate the fact that you know already in advance how much profit you earn in the end if you stay invested for the entire fixed investment period. If you are seeking active investment opportunities, then a fixed time deposit is probably not the best investment option for you.
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