Difference Between Term Deposits and Fixed Deposits

The stability and safety of an investment avenue are crucial when investing your hard-earned money. In the fast-growing financial industry of India, you may come across several investment avenues, but not all are safe and stable. However, some investment options are tried and trusted by investors across India, such as term deposits. Term deposits are investments wherein the depositor invests a sum of money for a fixed period. The investor cannot withdraw this amount until the end of the 'term' or duration of the deposit. There are two kinds of term deposits:

• Recurring Deposits – A fixed sum of money is invested at a specified interval in a recurring deposit. These investments earn interest on them until the maturity period.
• Fixed Deposits – A fixed sum of money is invested for a set duration in a fixed deposit. Depositors may not withdraw the money for the duration of the investment.

Both types of term deposits are designed to suit different kinds of investors. To understand which kind of term deposit works best, we must understand the concept of fixed and term deposits in detail.

What is a Fixed Deposit?

Fixed deposits are low-risk investments wherein the depositor invests a lumpsum amount for a predefined period. They offer a higher rate of interest compared to other investments. FDs are backed by CRISIL AAA/STABLE and ICRA (AAA) ratings; the interest rate on FDs depends on the duration, investment amount and the financial institution offering the FD.

What is a Term Deposit?

Simply put, a term deposit is any amount invested for a specific time or term. You can choose between a short-term deposit, typically three to six months. Or you could choose a long-term deposit with tenures of up to several years. Recurring deposits are a common and popular form of term deposits.

Difference Between Term Deposits & Fixed Deposits

Term deposits are an umbrella term to describe recurring and fixed deposits, wherein money is invested for a predefined period. However, investors often get confused between term deposits and fixed deposits. Here is a look at the primary differences between term deposits and fixed deposits to help you make a choice:

• A fixed deposit is a long-term investment. Therefore, it locks your money in longer and offers lower risk than other term deposits.
• A term deposit extends an existing deposit for a few months. In comparison, fixed deposits are for six months or more.
• Term deposits give depositors the flexibility to invest the amount in instalments. In a fixed deposit, the investor must invest in a lump sum.
• Term deposits offer a higher interest rate compared to fixed deposits. They usually have variable interest rates as opposed to fixed deposits wherein the interest rates are fixed – but the overall return is higher in term deposits.
• Fixed deposits are highly secure, with little or no risk. Term deposits are also safe and stable.
• Opening a term deposit or a fixed deposit is a simple process. Anyone can open a term or fixed deposit account by approaching their bank.
• Regarding fixed deposits, premature withdrawal may lead to a penalty on the return on investment.

Which One is Better? Term Deposit vs Fixed Deposit

Depositors can benefit by investing in both – term deposit vs fixed deposit. Depending on your financial goals, affordability, and earning pattern, you can choose which is better: Term Deposit vs Fixed Deposit. Here are some points that can help you decide which investment option is better.

• Amount – The first point to consider when considering investing is the amount you are willing to invest. If you have a large amount to invest, it is advisable to diversify and divide your investment into two or more avenues.
• Flexibility – Consider your financial needs, not just in the immediate future but also in the long term. Try to anticipate your need for liquid funds during the tenure of the investment. A fixed deposit is suitable if you don't need liquid money in the next few years.
• Financial Goals – If you have some financial goals, your investments should yield the required interest to enable you to reach your goals as soon as possible. Think about your economic progress and goals before choosing an investment option.
• Earning Pattern – People with a variable earning pattern, such as businessmen, find investing in fixed deposits easier and more suitable. Those who earn a fixed income every month, such as salaried individuals –prefer recurring or other term deposits so they can slowly grow their investments over time.