A fixed deposit account is a type of savings account that locks in a specific amount of money for a specified time frame. In return for locking in the money for the specified period, the depositor receives a rate of interest that is generally higher than the rates offered by other types of savings plans. The amount of interest offered on a fixed account of this type will vary, depending on the current state of the economy in the nation where the account is established.
The fixed deposit account is somewhat similar to a savings plan known as a recurring deposit account. In fact, the two terms are sometimes used interchangeably in countries where both plans are available. Typically, the recurring deposit account calls for making equal monthly deposits into the account over a specified number of years. In contrast, a fixed deposit account usually calls for making one lump sum deposit at the time the account is established, and allowing the funds to remain in the account until the agreed-upon maturity date. In addition, some banking institutions structure a fixed deposit account so that it is related to an existing savings account at the same institution, allowing for easy transfer of the funds.
It is not unusual for a fixed deposit account to require a minimum deposit. The amount of that deposit must be maintained throughout the maturity process in order to earn the higher interest rate associated with these types of accounts. Depending on the terms and provisions that apply to the account, depositors may be able to make additional deposits from time to time, with those newer deposits eligible for earning the same interest rate as the initial minimum deposit. For this reason, depositors are often encouraged to only move an amount of money that they can manage without for whatever term is assigned to the account. If funds must be withdrawn, the financial institution may impose penalties for the early withdrawal, and possibly also alter the interest rate that applies to the remaining balance.
Along with the much higher interest rate earned on a fixed deposit account, this financial tool is very helpful in setting aside funds for a specific purpose and growing that balance through the accrual of that interest. For example, a parent may choose to open a fixed deposit account as a means of accumulating funds for a child’s college education. Using an account of this type is also helpful in the task of accumulating funds for some type of major purchase several years down the road, such as a down payment on a home or the purchase of a new vehicle. As long as the depositor is able to leave the balance in the account alone until the agreed-upon withdrawal date, this approach offers all the benefits of a standard savings account, including a very low degree of risk, while also providing greater returns.