To understand the difference between a term deposit and a fixed deposit, you must know why the banks pay interest to the investors. Banks and financial institutions use the invested capital in other businesses as a loan. The profits from using the invested capital are shared as interest with the investors or depositors.
If the investors want to withdraw money at any point, it impacts the whole process. As a result, banks decide to put a cap on the time frame so that investors cannot withdraw for a specific period. That is why the penalties are levied if someone tries to withdraw. Usually, lenders charge a high penalty for pre-matured withdrawal, while RBL bank charges only a 1% penalty.
What is a Term Deposit?
In short, a term deposit is any amount invested or deposited for a specific term or tenure. There are different types of term deposits.
Term deposits are common in foreign countries, whereas fixed deposits are famous in Asian countries.
A short-term deposit is an amount deposited for a short period, usually between 3 and 6 months. Term deposits allow the investors to keep their money for a short period in the banks. One of India’s most common forms of term deposits is recurring deposits, which allow investors to deposit a small amount of money monthly for a specific term. A recurring deposit can have a tenure as small as three months. Recurring deposits do not need a lump sum. Instead, they allow you to pay a specific amount every month.
What is a Fixed Deposit?
Fixed deposits are safe ways to save money for a long time when you have a lump sum. A fixed deposit needs you to fix a lump sum for a specific term. This type of investment is safe, but it will require you to invest your money at once. Fixed deposits are secure options for those seeking a safer and more secure option.
Fixed Deposits vs. Term Deposits: How Do They Differ?
Flexibility differs between a short-term and a fixed deposit. Since a fixed deposit requires the entire investment collectively, it might cause pressure on some investors. On the other hand, a short-term deposit, such as a recurring deposit, allows one to pay in instalments.
2. Interest Rates
Term deposits promise a higher interest rate, whereas fixed deposits are safe and guaranteed. While interest rates can be tempting, sometimes, the nature of the tenure might not suit your needs. So, keep your needs as your priority.
Another significant difference between a term deposit and a fixed deposit is tenure. Term deposits have a shorter term, while FDs need you to keep your money for longer. Since premature closure is subjected to additional penalties, choose wisely.
4. Profit Margin
Terms deposits are most advantageous for the lenders because the interest bank pays to the customer is lower than what the bank accrues from its clients. In the case of fixed deposits, the investors can gain good returns.
There are three options available in RBL Bank, monthly, quarterly, and till the maturity date. The fixed deposit option can be the best fit if you have the capital ready. RBL Bank, at present, offers a fixed deposit of 7.55%. But there will be a penalty charge of 1% at the premature withdrawal. In this case, it is better to keep the money invested till the maturity date or choose the fixed deposit plan wisely. More importantly, calculating interest has also become easier with the FD calculator.
Which One is Better: Term Deposit or Fixed Deposit?
Considering the features of both types, these two types of investment are two sides of the same coin. You must thoroughly understand the investment process and which kind of investment would benefit you. The amount will be fixed for a particular type chosen by you, and the return will be available at maturity. The term is primarily beneficial for the lenders, while the fixed deposit is for the investors.