You have mostly heard about all the different kinds of deposits that the banks are willing to offer you. Now, don't ask why there are many variants in the kinds of deposits that are offered by banks today. Every individual is different, and so are his financial goals; they can differ from one another. This is exactly why we need different instruments to suit each financial goal. Time Deposits are one of them. Let's understand this a little deeper.
What is the Meaning of a Time Deposit?
A time deposit is also known as a term deposit; it is an interest-bearing bank account with a fixed tenure. It will let the depositors grow their money with higher interest rates when compared to a regular savings account.
Now, do not be confused.
Time deposits and term deposits are not different from each other. As you just come across this term, you would not be quite familiar with it, but they are also term deposits. For starters, fixed deposits and recurring deposits are known as time deposits.
But, this confusion does usually occur because term deposits are called differently in different parts of the world. In the US, it is known as the term certificate of deposit; in anglophone countries, it is either called term or time deposit and much more.
How Does a Time Deposit Work?
Let's use an example for this.
Just say you have a lump sum amount of money that you want to lock in somewhere, and you also want to grow it through some interest.
A time deposit would be the best choice. Time deposits, such as a fixed deposit.
You can look into bank FD rates, such as SBI FD rates, Kotak Mahindra Bank FD rates, and more. Or, you could also look at NBFC FD rates like Shriram Transport - and for whichever you feel gives you the best returns, you can make a choice.
Once you are done choosing the right FD from a reliable provider, you can open an FD account with that bank or the NBFC and get started. You can select the tenure that you want to keep your money in that account; let's say you want to stay invested for five years, you can.
The institution will keep depositing a sum of interest into your account every year or quarter - depending on your preference. Once the tenure has been completed, you can withdraw the money, along with interest earned.
The tricky part you are mostly wondering about is whether you can break off the fixed tenure or not. Here is the answer to it.
Can the Time Deposit be Discontinued?
Breaking off the time deposit before its tenure has been completed could cost. Well, there are only certain circumstances on where you will be allowed to take out the money. Those are sudden medical needs or instant emergencies.
But, when you break off the time deposit in the mid of the decided tenure, you will be charged a certain sum of penalty. This will be charged out of your sum of money.
Moreover, when you do break it off, you will also lose out on the interest you will be earning for the rest of the period.
The Types of Time Deposits
Time deposits are mainly of two types, and that is:
a) A Fixed Deposit
b) A Recurring Deposit
Meaning:-
- A fixed deposit is when a lump sum amount is locked in an account and earns interest for a fixed period of time.
- A recurring deposit is when the account-holder will deposit a sum of the amount every month to make up to some amount at the end of tenure.
Suitability:-
- A fixed deposit is most suited for the people who have a lump sum amount that they would not be used for a period of time.
- A recurring deposit is most suited for the people who do not have a lump sum, but they can invest a small amount each month to make up for a lump sum.
Benefits:-
- A fixed deposit can lock in a big sum of money without having to spend it off or being tempted to spend it.
- A recurring deposit is one where you can even start off with a small sum of money.
Disadvantage:-
Both these deposits are a fixed period of time, and when broken off during the time required, they will charge you with some money.
How is a Time Deposit Better than a Savings Account?
A time deposit is very different from a savings account; though both types of accounts will earn you some amount of interest, they will differ from each other. A time deposit will offer you greater rates of interest; you cannot take out the money when you feel like it, which means you will be saving more than you are spending.
Conclusion
Investing through a time deposit is the same as investing in an FD or an RD; though there are all these varied terms to the FDs and RDs, they will work the same as you know it.
