Time Deposit

When it comes to saving and investing, you can choose from different types of accounts to grow your wealth. A time deposit is a popular option among most conservative investors. A time deposit account is an interest-bearing account where you deposit a lump sum amount for a specific period. Also known as term deposits, time deposit accounts offer relatively higher interest rates than regular savings accounts. Moreover, these accounts tend to be less flexible since you cannot withdraw your funds before the pre-set maturity date.

Banks offer term deposit accounts to fund their lending operations. The funds deposited into the time deposit account remain locked in for a specific duration. In other words, the account holder cannot make a withdrawal request until the account reaches its set maturity date. During this tenure, the bank can lend these funds to other customers. These funds are lent at a higher interest rate than the interest rate on the time deposit account. The bank profits from the difference between the bank’s loan rate and time deposit interest rate. Alternatively, banks can also invest the funds into other securities that pay a higher rate of return than the quoted time deposit interest payable to the account holder.

Fixed Deposit (FD) can be a good choice for investment. FDs provide a fixed interest rate throughout the investment period. Interest rate on FDs does not change with market fluctuations.

Also Read: Time deposit vs. Fixed deposit

When you open a time deposit account at a bank or NBFC, you deposit a lump-sum amount for a predetermined period. Some financial institutions may have a minimum deposit requirement for their time deposit accounts. The deposited funds remain stored in the account for a specific period during which you cannot withdraw. This term can range from one month to five years. The interest rate on your time deposit account is locked in on the day you open the account and remains fixed through its tenure. Time deposit interest rates tend to be higher than regular savings accounts, with longer terms offering higher interest rates. Most financial institutions have time deposit calculators you can use to compute your interest earnings and total corpus over varying tenures. Time deposits offer guaranteed returns and complete capital safety, making them apt options for risk-averse investors. 

You can choose from varying time deposit tenures depending on your investment objective and liquidity requirements. Generally, time deposits come with a minimum tenure of 30 days. However, you can opt for longer tenures for better interest earnings. Once your time deposit matures, you can choose to withdraw the corpus and close the account. Alternatively, you can also choose to renew the account for another term.
 

Longer terms earn higher interest

Generally, the longer the investment tenure of your time deposit, the higher the interest rate paid on the investment. For instance, a 1-year FD may offer an interest rate of 6% p.a., while a 3-year FD can offers an interest rate of 7.20%. Additionally, there are generally two rates quoted for time deposits. First is the simple interest rate, which is a percentage interest you earn if you withdraw the interest earnings every month. Second is the effective interest rate or APY (annual percentage yield), which is the amount you receive if the interest is allowed to remain in the account and compound over time. Given the power of compounding, APY is generally higher. In other words, the interest calculations for cumulative and non-cumulative FDs also vary. However, longer tenures may not always mean higher interest earnings. You should carefully check the interest rates offered for varying tenures by the bank or financial institution you choose.
 

You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.

Time deposits, just like other financial products, come with their own sets of advantages and disadvantages. While time deposits allow you to earn higher-than-average interest and ensure capital safety, they also have certain downsides. Let us take a look at the drawbacks of a term deposit account:

• Low returns: Time deposits offer higher returns than regular savings accounts but fail to match up to the returns from other investment products. Market-linked investment instruments like bonds and mutual funds can offer better returns than time deposits. In other words, investing in time deposits can be an opportunity loss since you can invest the funds in other instruments and earn better.
• Interest rate risk: Time deposits are locked in at the prevalent interest rate on the day the account is opened. This rate remains fixed throughout the tenure of the account. Interest rate risk arises when you open a time deposit account for the long term. Over time, interest rates may rise while your funds remain locked at a comparatively lower rate.
• Lack of liquidity: Time deposit accounts offer poor liquidity since you can withdraw your corpus before the end of the fixed tenure. Banks may allow premature withdrawals, but such withdrawals also attract penalties. Therefore, you cannot easily fall back on your time deposit investment when you urgently need cash.
• Lack of inflation-beating returns: Fixed interest rates cannot keep pace with inflationary pressures. Rising general interest rates signal higher inflation rates. In such a scenario, your time-deposit funds are actually losing value in terms of their real purchasing power.

If you want to open a time deposit account, you can do so by visiting your preferred bank branch or NBFC office. Next, you must fill out the application form for the time deposit account and submit copies of essential documents like your PAN Card and Aadhaar Card. Most banks and NBFCs allow customers to open time deposit accounts online. To do so, you have to visit their website and select the time deposit option. Fill in the online time deposit account opening form with the fund amount and investment tenure details. Once your e-KYC process is completed and your form is verified against your documents like PAN and Aadhaar Card, you can deposit the lump-sum fund via a preferred transfer mode like net banking, UPI, RTGS, or NEFT. 

If you are a low-risk investor seeking higher returns than regular savings accounts, you should consider time deposit accounts. These accounts help grow your savings without market exposure. You invest a lump-sum amount into term deposit accounts, earning a fixed interest on the same. These accounts combine capital safety and guaranteed returns with relatively high returns compared to other conventional saving avenues.