• Advantages and Disadvantages of Fixed Deposits

    Investments are a great way of making your money grow for you. The range of investment options are varied, numerous and each come with their own degree of risk. Generally the greater the risk, the greater the growth potential. The risk associated with faster growth may not be everybody’s cup of tea and for those who would like to play it safer, there are investment options that provide moderate returns for very low risk. Fixed deposits is one such investment option that falls into moderate growth segment. Fixed deposits or otherwise known by its abbreviation “FD” is a type of account offered by Banks in Malaysia that not only serves the purpose of a savings account but also provides investment benefits by offering an interest rate on the amount in the account at a much higher rate than a conventional savings account.

    Unlike conventional savings accounts where the interest is calculated on a daily basis and is received at the end of a month, fixed deposits offer a higher interest rate for fixed periods of time. These periods may vary from Bank to Bank. The returns from a fixed deposit can easily be calculated as both the interest rate and the term is fixed.

    Basic concept of a Fixed Deposit

    An investor has to deposit a sum into the fixed deposit account. The fixed deposit will have a fixed tenure and fixed rate of interest. The tenure and interest rates offered vary from Bank to Bank. Once the money has been deposited, the investor loses access to his funds for the duration of the tenure. The tenure can range anywhere between 1 to 5 years and each tenure comes with a pre-fixed interest rate. At the end of the tenure, the investor will receive the principal amount deposited plus the interest accumulated on the amount.

    Fixed deposits are a popular choice among first time investors as it is a straightforward guaranteed method to acquire returns on an investment.

    Advantages of Fixed Deposits

    The first and foremost advantage of a Fixed Deposit is the higher interest rate. Albeit the interest offered on a fixed deposit varies from bank to bank, the interest offered is still much higher compared to the conventional savings account.

    Fixed deposits offer a regular source of income. Although the investor has no access to the funds deposited, the fixed deposit attracts a high interest at regular intervals such as monthly, quarterly or annually and some banks offer the option of having the interest generated transferred to another account of the investor’s choice. This way the investor still has access to a regular source of income generated through the fixed deposit interest and are a popular choice among retirees.

    This form of investment has little to no risk attached. It is a simple form of investment and banks that offer fixed deposits are financially stable and credible. In Malaysia, fixed deposits are protected by PIDM or Perbadanan Insurans Deposit Malaysia, a government agency established to protect citizens against unlikely bank failure. The investment also is very straightforward and requires no in depth knowledge of stock markets allowing investors to sit back and watch their money earn returns.

    Disadvantages of Fixed Deposits

    The biggest drawback may be the fact that the investor has no access to his principal amount as he would have in a savings account. Even though this kind of account would help the investor by keeping his funds secure for longer, in cases of emergencies when there is a need for cash, the investor will not have access to it. Even the investor breaks the deposit and withdraws the money prior to completion of the tenure then he/she would forfeit any interest generated by it.

    As safe as they may be, a fixed deposit generates low profit investments. Investments in stock markets and equities if utilized effectively can fetch returns at an exponential rate.

    There is no participation from the investor. For a first time investor, fixed deposits may seem ideal but for the intermediate and experienced investors the lack of active participation and the overall passive nature may seem quite unappealing.

    When one is opting for a fixed deposit, they should also do research on the terms or tenures offered and choose the one that best works for them. Short term deposits are usually under a year whereas long term fixed deposits with tenures ranging above 1 year. Each type of fixed deposit has its own advantages and disadvantages. A short term goal deposit may provide quick access to the funds whereas a long term fixed deposit will generate more profit. When one is going in for a fixed deposit they should consider all their options before settling on a particular fixed deposit.

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