A fixed deposit account is a type of account where an individual invests an amount for a defined period of time. The individual earns a certain amount as interest over the deposit amount. The interest earned can be added to the account monthly, half-yearly or on maturity. Different banks offer different interest rates and varying intervals of crediting the interest.
Fixed deposit accounts are an ideal option for a first-time investor. This is because fixed deposits involve low risk as the deposit amount is insured by PIDM. PIDM ensures you that you receive the returns in the unlikely event that the bank fails. However, similar to any other form of investment, fixed deposits have advantages and disadvantages. You have to consider these factors before you invest in fixed deposits.
Advantages of Fixed Deposits
- Fixed deposit accounts offer interest rates that are much higher as compared to the interest rates offered on a normal savings account. The longer the tenure, the more returns you stand to earn.
- A fixed deposit account can be useful as it makes you eligible for an overdraft facility. Banks consider the fixed deposit as a collateral and provide up to 100% of the fixed deposit amount for financing. Therefore, you do not have to withdraw the fixed deposit before maturity and still can have funds for your needs. You also get the convenience of borrowing the amount already repaid as and when required, within the specified limit.
- Certain fixed deposits provide the option of partial withdrawals. Based on when the withdrawal was made, you can still earn some interest and have the money to meet emergency expenses.
- Money invested in a fixed deposit is guaranteed to you at the end of the deposit tenure. Even when partial withdrawals or early withdrawals are made, you’re initial deposit sum is guaranteed unlike stocks or shares where the invested sum is subject to market risks.
- You have the freedom to choose a tenure that best suits your needs. You can make the required calculations and figure out what tenure gives you better returns. Also, the depositor is free to choose the deposit amount, provided they have met the minimum deposit criteria which is usually RM5,000 for 1-month tenures or RM500 and above for tenures of 2 months or more.
- FDs provide you the option of automatically renewing your deposit. The FD can be renewed for the same term either with just the initial deposit amount or the initial deposit amount and profit earned from the previous term.
Disadvantages of Fixed Deposits
- Though it is considered safe, fixed deposits are low-return investments as compared to stocks or real estate investments.
- If you withdraw the deposit before the maturity of the tenure and within a period of 3 months from the commencement of the deposit account, then you may not receive any interest for that period.
- Some banks do not offer partial withdrawals in which case you risk losing out on any interest earned.
- FDs do not require active participation from the investor. The concept of FDs may seem unappealing to those who wish to overcome a learning curve and be fully involved in their investments.