For anyone looking for a safe return on an investment, understanding the difference between a term deposit and a fixed deposit is essential. While term deposits hold money at a fixed maturity, fixed deposits hold money for a fixed duration of time. Because banks handle these type of deposit differently, here’s what you need to know to keep your investments protected.
What is a term deposit?
When individuals open a term deposit account, they deposit a sum of money to be kept for a fixed maturity, and they’re not allowed to withdraw this money until the end of the maturity period. In other words, term deposits involve depositing a sum of money in an account for a fixed amount of time.
During this fixed period of time, the account owner earns a fixed rate of interest. In Australia, Authorised Deposit-Taking Institutions, or ADIs, offer fixed rates of interest and protects up to $250,000.
Once the maturity period has been reached, the account holder can choose to reinvest the money into another term deposit account. The account holder also has the option of cashing out the interest earnings to spend a vacation, a new car, or whatever they want.
Today, term deposit rates in Australia are at an all-time low because of a number of factors, including market competition and banking regulations. Therefore, to earn the highest return for your investment, you’ll need to search around for high-term deposit rates. Luckily, some companies make it easy for investors to compare rates across different banks and terms to score the highest return.
What is a fixed deposit?
Term deposits can be divided into two types: Recurring deposits and fixed deposits. A recurring deposit involves investing a fixed amount of money at a fixed interval. Typically, investors who make recurring deposits opt for a fixed interval of once per month. Investors earn interest on their deposits until the end of the maturity period, and each deposit has the same maturity period.
Fixed deposits involve investing an amount of money for a fixed duration of time. Fixed durations typically provide flexible durations and can range anywhere from one week to 10 years. When it comes to earning interest, fixed deposit interest rates depend on the duration of time that the money is invested.
For both recurring deposits and fixed deposits, investors are unable to withdraw money until the maturity period is reached. When investors withdraw money before the end of the maturity period, banks typically lower the rate of interest.
If you have a savings account and are interested in fixed deposits, contact your bank. Some banks allow savings account holders to automatically convert any amount over a specified balance into a fixed deposit. This can ultimately help savings account holders earn more interest, because their savings will be subject to a higher interest rate.
How do term deposits work for banks?
Because banks are primarily concerned with lending and borrowing money, term deposits provide banks with funds to lend money. Banks obtain funds from term deposits, savings accounts, and current accounts, and benefit account holders by allowing them to earn interest on their investments.
Banks constantly need funds for lenders, and term deposits allow them to loan money in the form of locked-in capital.
All in all, term deposits are a great option for investors who wish to make a safe and stable return. In addition, because investors have a government guarantee of up to $250,000, virtually no risk is associated with investing money in a term deposit. Investors who want to maximize their returns should seek out the highest term deposit rates.