What is a Term Deposit Account?

Osmand Vitez
Osmand Vitez
Businessman with a briefcase
Businessman with a briefcase

A term deposit account is a highly conservative investment that provides investors with pre-determined interest income. Many financial companies offer these investments with varying terms. For most investors, a term deposit account requires them to leave a specific amount of money in a special bank account for a set term, usually three months to five years. The money will accrue interest at a fixed rate, and no withdrawals are allowed by the account holder during this time. This allows investors to increase their return through the compound interest earned on initial balances.

Conservative investment strategies typically focus on retaining the principle balance an investor places into investment instruments. Using a term deposit account is conservative because most banks offer some type of insurance to account holders in case the bank fails to repay the investor. Government institutions may provide the insurance as few insurance companies or other private sector institutions can handle this responsibility. Other reasons investors go through a bank or similar financial institution is because they might receive a higher rate of interest if they conduct more business with the institution. For example, holding a checking account, mortgage or car loan through a bank may result in more favorable interest rates on investment accounts.

Investors will need to carefully apportion their money when investing through a term deposit account. Because they cannot move this money without facing penalties, investors should take every precaution to not link this investment account with other funds. Under some circumstances, an investor may be able to withdraw the money for an emergency. A severe penalty or loss of accrued interest may be among the penalties incurred for breaking the investment agreement, however. Maintenance fees or other charges may also apply to these investments. Investors should shop around and work with various financial institutions to create the best term deposit account investment as possible.

To begin a term deposit account, investors will need to agree to a term for the investment. Longer terms, such as those spanning several years, typically pay out higher interest rates. The trade-off for these rates may ae stiff penalties for early withdrawal or other fees associated with the account. Other terms may include the financial institution’s ability to adjust the interest rate with regular fluctuations incurred by the nation’s central bank. This allows the bank to lower rates for financial returns paid to investors in order to save the bank money if they cannot earn sufficient interest on loans made to borrowers.

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      Businessman with a briefcase