When it comes to saving money, there are a few banking tools most depositors are familiar with — most savers own at least one savings account, and some may have even opened a money market account, according to http://www.businessinsider.com.
However, another great savings account many people don’t know much about is the fixed deposit account.
If you are currently searching for new ways to grow your money, a fixed deposit may get you to your savings goals faster. But before opening an account, learn more about the lesser-known features of this type of account.
What is a fixed deposit?
A fixed deposit is a type of product offered by banks and credit unions that serves a similar function as a savings account. It allows you to deposit money in with a financial institution and earn interest.
The difference, however, between a fixed deposit and traditional savings account is that fixed deposits require you to leave your money in the account — untouched — for a predetermined amount of time.
Fixed deposit rates are usually fixed for the entire term, which means the interest rate offered when you open the account remains the same until the account matures. Account terms can last anywhere from 30 days to five years or more, depending on the financial institution’s options. Generally, the longer the fixed deposit term, the higher the interest rate.
It is important to know that banks and credit unions want to ensure you don’t touch your deposit until the fixed deposit matures; so withdrawing money early will almost always result in a significant penalty.
In order to open a fixed deposit, you usually have to contribute a minimum opening deposit. Pay close attention to minimum deposit amounts since banks sometimes provide higher interest rates for bigger deposits.
Things you might not know about fixed deposit
Now that you know a few basics of fixed deposit accounts, here are some aspects of these accounts that make them unique. It is important to keep these in mind as you decide whether a fixed deposit is right for you.
There are several types of fixed deposits: There are numerous ways to invest in fixed deposits. You can place your money in a traditional account, which allows you to deposit a fixed amount of money for a specific term and receive a predetermined interest rate.
A bump-up fixed deposit allows you to take advantage of a higher interest rate midway through your fixed deposit term. These fixed deposit typically comes with a lower starting rate.
Liquid fixed deposits allow customers to withdraw funds without incurring a penalty, but may require that you maintain a minimum balance to acquire that privilege.
Callable fixed deposits allow banks to take back the interest rate they originally offered and provide a lower one instead. Typically, these accounts pay higher starting interest as a reward for taking on the risk of having your fixed deposit called back.
CDs can automatically renew: Many financial institutions will automatically roll your fixed deposit into a new account when it matures if you don’t advise otherwise. A fixed deposit rollover can be a good thing, but not in every case.
If you don’t need access to your money and interest rates have remained the same (or have gone up), an automatic renewal of your fixed deposit is convenient and allows you to keep earning interest without visiting the bank to open a new account. However, if you do need that money, or interest rates have dropped at that particular bank, allowing your fixed deposit to roll over means you are stuck with a long-term deposit at a lower rate until the account matures again.
You will find out whether or not your fixed deposit account automatically renews when you open it, as well as the grace period for letting your bank know whether or not you actually want the funds to roll over.
It’s possible to invest in long-term CDs without losing liquidity: A fixed deposit laddering is an investment strategy used by individuals who are interested in acquiring several long-term fixed deposits (one to five years) but want to avoid losing access to all their money for several years.
Laddering involves spreading your money across fixed deposits at various terms (six-month, one-year, 18-month, two-year, etc.) so that you can always have funds available every six months to one year, while still earning higher interest rates on longer-term accounts.
You can invest in fixed deposits within your retirement account: As with many types of interest, the interest earned on fixed deposit is taxable as income.
Banks often market fixed deposits that are slightly different than traditional fixed deposits. They don’t require you to roll funds. Instead, you can simply open an account, fund the account with a personal bank account and begin earning interest as you would a traditional fixed deposit.
Sometimes, banks will offer more attractive rates for fixed deposits and require no minimum deposits to lure in customers. But in most cases, they offer the same terms, penalties, etc. as the traditional fixed deposit.
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