Is a term deposit better than a high-yield savings account
Many people choose high-interest savings as an option for building wealth, while some consider term deposits a better choice. While each has distinct advantages and downsides, it’s essential to become fully informed to make the best decision for your financial circumstances.
A term deposit or fixed deposit is a type of investment where a client deposits a designated sum at an agreed interest rate for a predetermined time period from a month to as long as five years. Customers can invest with credit unions, traditional banks, NBFC – Non-Banking Financial Companies, and post offices.
Defining the traits of term deposits and how it works
When looking at a term deposit vs savings account, term deposits are a low-risk, unique investment with defining traits distinguishing them from other savings.
- Volatility: The interest with term deposits doesn’t correlate with the state of the economy or market volatility. It’s among the least risky investments.
- Guarantees: Interest is fixed for a set term with no fluctuations.
- Term: The investor decides the term length based on the institution’s provisions. As a rule, interest is higher the longer the duration, but comparing the ratios with the interest before committing is wise.
- Disbursement: The investment can choose interest disbursement monthly, quarterly, or yearly or decide to wait for maturity.
- Wealth: The stability of term deposits means that an investor will accumulate wealth even in a tough market.
- Renew: If the investor chooses to, the funds can be rolled over to a new term when maturity is reached with the existing term deposit and continue accruing interest.
- Penalties: Term deposits have a fixed term, meaning the interest is essentially locked in. If an investor wants to make an early withdrawal, they will be liable to pay the provider a penalty and receive the funds at a lowered interest.
- Tax: The interest accrued with term deposits is taxable income based on Income Tax Act and can be subject to a “TDS – Tax Deducted at the Source.”
Essentially, a term deposit works comparably to savings, except the funds cannot be withdrawn or added to; they are inaccessible until maturity. In exchange, you lock in at a substantially higher interest over the designated term instead of a typical variable rate associated with savings.
The interest is determined by the amount being invested and the term. The greater the investment and the longer the term, the higher the rate and wealth you’ll accumulate. You can set a term of as little as one month up to as long as five years, fixed.
Term deposits eliminate the temptation of withdrawals and spending often seen with savings. When the term is reached, you can reinvest following the original terms or accept the payout into an account of your choosing. Visit https://www.investopedia.com/terms/t/termdeposit.asp for the fundamentals of a term deposit.
Types of term deposits
There are a few types of term deposits for investors to choose from. Some include the following:
Short-term/long-term
Investors seeking fast returns will opt for short-term deposits with a lock-in period of between 1 and 12 months. Longer-term deposits have higher interest rates and longer terms. The time periods range from 1 year up to 10 years.
Senior citizen deposits
Individuals aged 60+ are categorized as senior citizens. Many financial institutions provide a higher interest rate for senior citizens investing in term deposits. This distinct group is further eligible for tax-saving products from some institutions.
Post office
The post office offers specific financial provisions such as term deposits that can either be opened as an individual or joint account. You can transfer these from one post office to another or carry several term deposits with one post office.
An account with a term of 5+ years is eligible for tax benefits, as noted in the 1961 Income Tax Act Section 80C.
Perks with a term deposit
A term deposit involves setting funds into a low-risk investment account for a set term with a guaranteed interest rate. The certainty of knowing the return that will be available at the end of the term makes this an attractive option for many people. Here are a few advantages associated with this choice.
Consistency
Some providers will offer savings accounts with comparable interest rates to those provided with term deposits, but typically, you must meet eligibility criteria to receive these rates.
That can involve making a minimum deposit into a linked transaction account and incurring a minimum number of monthly purchases using your card. Term deposits have no contingencies. These are essentially a “set and forget” system with an understanding that you consistently build interest in your wealth.
The appeal with a term deposit is the guaranteed return. This investment does not correlate with the market in the same way as real estate or stocks. These are protected from volatility, allowing greater security in your gains.
The government backs the guarantee up to $250,000 for investors less tolerant of risk.
The motivation
The higher your high-yield savings account balance, the greater the temptation and excuses for the need to pull some out. With term deposits, you won’t have access to the funds for a designated time period without bank authority. These are structured with a term during which interest will accrue; your wealth will build.
Early withdrawal will likely result in an interest adjustment. There’s no guarantee that you can’t take money from your term deposit. It is, after all, your money, but it’s not as easy as it is with savings. Go here to learn about types of savings accounts meant to help your money grow.
Final thought
A term deposit is an option for saving money over a shorter term in an investment format. The downside is that you can be penalized if you access the money before the term matures.
Otherwise, the money will stay in the account, growing at a higher-than-average interest rate until a term you designate has been reached. At that point, you can pull it into an account to use it or renew the term deposit and continue to build the wealth.
Is it better than high-yield savings? It’s a matter of preference and specific needs and purposes. Some savings have comparable interest, but you must meet eligibility. The money is also readily accessible, so your wealth may be at risk if you’re easily tempted.
