What is a Deposit?
Deposit is a term used to denote the money kept or held in any bank
account,
especially to accumulate interest. The fund used as a security to
get the goods
delivered can also be called a deposit. Any transaction processed to
transfer
money to an entity for safeguarding can be referred to as a deposit.
First, deposit refers to the process involving the transfer of a sum
of money to
another entity to be kept in its custody is a deposit. Hence, the
money
transferred by investors to saving accounts at credit unions or
banks are
deposits. Here, the money transferred still belongs to the one who
originally
deposited the money, and that entity is eligible to transfer the
fund to another
entity’s account, withdraw any portion of funds any time, and/or use
the fund
for purchasing products and services.
Generally, a person needs to deposit a certain amount to open a bank
account.
The amount is called the minimum deposit. The deposits made into the
checking accounts are transaction deposits, implying the funds are
liquid and
available immediately.
Types of Deposits:
The following are the two common
types of deposits:
- 1. Time Deposit
A bank deposit with a fixed interest rate and term is called a time deposit. A person cannot withdraw money from a time deposit account for a fixed term or must pay a penalty should he/she need to withdraw funds before the term ends. The penalty amount depends on the issuer and the term of the time deposit.
A time deposit account is an interest-bearing account that allows the depositor to accumulate money at higher rates of interest than the standard savings account. When the term period ends, account holders can either withdraw the funds or renew the deposit to be held for another term.
The funds in time deposit accounts are used by financial institutions to provide financial products – such as loans – to eligible businesses or individuals. For making profits, banks lend the funds kept in time deposit accounts at interest rates higher than the ones provided to the depositors. - 2. Demand Deposit
The money deposited with a financial institution that can be drawn from the account without providing any prior notice is called a demand deposit.
Generally, demand deposits pay very little interest or no interest at all since the lock-in periods are shorter than time deposits.
Below are three types of demand deposit accounts: - ● Checking Account:
A checking account enables easy cash accessibility by allowing withdrawals from debit cards, ATMs, and writing checks. Thus, the checking account helps to improve the liquidity of small businesses over the short term. - ● Money Market Account:
The interest rates of a money market account depend on the market, and hence, the interest rates vary daily. Thus, this account sometimes offers higher and sometimes lower than savings accounts. - ● Term Deposit or Fixed Deposit:
They are a type of deposit accounts intended for longer periods. They also provide higher interest rates and lesser liquidity than checking accounts. Direct withdrawal through checks is not allowed. Banks may charge fees for early withdrawal of funds.
- ● A fixed deposit or term deposit is the correct choice if you have a large amount of money saved to invest.
- ● Fixed deposits are offered by all the significant banks and money-related foundations or NBFC. In this plan, you can contribute a particular amount, and you will get a fixed interest.
- ● Investing in a fixed deposit means you cannot withdraw your money invested before the maturity period. People who choose to put their funds into fixed deposits should pick a term between 7 days to 10 years.
Factors To Consider Before Investing in Fixed Deposits
Here are a few things you should be aware of before choosing to invest in fixed deposits and decide which bank or NBFC is best for deposit.
- ● Deposit Limit
The first factor to consider is the deposit limit. The deposit limit refers to the maximum amount a bank can offer in a fixed deposit. This is because banks often use this amount as a benchmark when assessing whether to offer you a fixed deposit. - ● Interest Rates
The next thing you need to consider while investing in fixed deposits is the interest rates different banks or NBFC offer. The interest rates charged by different banks can vary depending on their ratings and financial strength. - ● Liquidity
This means how quickly your money will be available when needed. In addition, you should ensure that the bank has enough cash reserves to pay out your fixed deposit when it matures (after a certain period). - ● Tax Benefits
A fixed deposit is a good option if you want to benefit from a tax deduction on your earnings. The Government provides an interest rate deduction in the form of tax, which you can claim as an exemption from Income Tax. The amount of interest you can claim depends on your income and other factors. - ● Tenure
The tenure of a fixed deposit is one thing you should consider beforehand. Before investing in any financial instrument like fixed deposits, you must know how long your money will remain in the bank for safe keeping and its interest rates. - Conclusion:
A fixed deposit is the correct choice if you have a large amount of money saved to invest. Fixed deposits and recurring deposits are investments without risk.
While FDs are safe investments, to decide which one to opt for one must investigate certain factors like the surety of earnings, risk calculations, cash earnings, pay-outs, etc is tricky. One must always plan such investments by researching different schemes and benefits and choosing the most rewarding scheme.