A fixed deposit is a popular choice of investments among first time investors. It involves depositing a large sum of money for a fixed period of time for a particular rate of interest higher than that offered for savings accounts. The interest offered varies from bank to bank and the principal amount with interest is paid out at maturity to the investor. During the tenure of the fixed deposit the investor does not have access to the funds. The popularity for this type of investment is due to the fact that it offers a guaranteed return on the invested capital and has no risk exposure.

Below are the glossary of terms one comes across when looking to invest in a fixed deposit.

## Interest Rate

The interest rate offered for fixed deposits is the rate at which the investment generates a return. The FD interest rate offered by bank varies and also depends on the tenure. For example if a fixed deposit offers an interest rate of 3% and the amount deposited is RM 1000, then the returns generate at a rate of 3% of the principal amount which in this case is RM 30.

Compare Fixed Deposit Rates in Malaysia |

## Profit Rate

This term is found in Islamic banking. Islamic banking allows for fixed deposits through the Shariah concept of Murabahah which compensates for the fact that accepting interest or paying interest or Riba is prohibited. Profit rates vary from Bank to Bank and are made known to the customer at the onset of making the deposit. Profit rates are dependent on the bank’s performance.

## Murabahah

This is a Shariah based concept in Islamic Banking that allows for a form of Islamic fixed deposits. It basically implies a sale of goods where one party sells Shariah based commodities to the other party at profit mark-up that is agreed beforehand by both parties involved. An example is when one deposits money into an Islamic fixed deposit account, the Islamic bank uses this money to buy and sell Shariah based commodities and returns principal amount plus a percentage of the profit back to the investor on a basis of payment that is deferred. Both the bank and the investor here are aware of the cost and profit of the commodity.

## Mark-up

This is defined as the difference between the cost of a commodity and its actual selling price.

## Tenure

The tenure or term in fixed deposits implies the time taken for the fixed deposits to attain maturity. An example is if a person invests in a fixed deposit with an interest rate of 3% and a principal sum of RM 5000 for a term of 1 month, then in 1 month's’ time the deposit will attain maturity and the investor will receive the principal amount plus interest which amounts to RM 5150

## Step up Fixed Deposit

This type of fixed deposit has different periods in tenure which attracts different rates of interest and acts as sort of a ladder. An example of a step up fixed deposit is if a person invests in a step up fixed deposit having an interest rate of 6.88% p.a. and a tenure of 6 months then the fixed deposit will be split into periods or steps with the first step being a period of 2 months attracting 3% interest, months 3 and 4 attract 3.15% interest, 5th month attracts 3.24% and the sixth month will attract an interest rate of 6.88%

## CASA Bundling

This is a type of fixed deposit that requires the investor to open a current account or savings account when depositing funds in an FD. The CASA or current and savings account would require the investor to deposit a fixed amount or a percentage of the amount invested in the FD.

## Effective Interest Rate

This is the interest rate the fixed deposit will incur effectively throughout the duration. It differs from the advertised interest rate. Taking the above example, the advertised interest rate is 6.88% whereas the effective interest rate of the fixed deposit will be close to 3.73%

## Full Withdrawal

This refers to making a complete withdrawal of the funds invested in a fixed deposit. Doing so will void any returns accumulated.

## Partial Withdrawal

An investor is allowed to make a partial withdrawal which is usually a fixed amount or a percentage of the amount invested. The availability of partial withdrawal is subject to the terms and conditions set forth by each bank. Partial withdrawals will lower the returns that the fixed deposit can generate.

## Lock-in period

This period which is usually 3 months for most banks is a period of time right after the fixed deposit commences in which one cannot make a partial withdrawal and doing so would void any chance of returns being generated.

## PIDM

Perbadanan Insurans Deposit Malaysia, is a government agency that was set up to protect the Malaysian citizens from losing their money invested in fixed deposits in the unlikely event of the bank’s failure.

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