Fixed deposit schemes allow investors to invest their money at a fixed rate of interest for a fixed amount of time. Available from many financial institutions, fixed deposit schemes allow a very safe form of investing, but have numerous factors that may be disadvantages. Understanding the advantages and disadvantages of investing in fixed deposit schemes can help an investor or company decide if this type of account will be the best match.
One of the major advantages of fixed deposit schemes is that most are considered nearly risk-free investments. The fixed rate of interest guarantees earnings of a certain amount, based on the principal, and does not require any investment knowledge on the part of the account holder. In the US and many other regions, fixed deposit schemes are backed by government insurance against loss.
Another advantage to fixed deposit schemes is that they provide a higher rate of interest returns than normal savings accounts. While the principal amount cannot be withdrawn until maturity, some plans allow periodic withdrawal of the interest earned by the account. Using a fixed account will help money be more productive in the long run than a traditional savings account, and with less risk than other investment accounts.
A major factor in fixed deposit schemes that may be seen as an advantage or disadvantage is that principal funds cannot be accessed under any circumstances until the account reaches maturity. Putting money in a fixed account is essentially saying good-bye to it for a period of several years. Even in an emergency, the money cannot be reached, although some financial institutions will allow a customer to use a fixed account as collateral for an emergency loan. For people who have a habit of squandering funds, this inaccessibility may actually be an advantage.
Many experts consider the largest disadvantage of a fixed account to be its inflexibility of interest. If interest rates skyrocket due to economic changes, a person who has invested the majority of his savings in a fixed account will not be able to take advantage of new rates. Stuck with the interest rate agreed upon, the account holder may still make money, but may make far less than in a variable rate account when the market is good. On the other hand, if interest rates drop sharply, the investor has the security of knowing that his returns will stay the same regardless of the change.