Fixed Deposit Basics
In layman's term, a fixed deposit account is an investment that pays you a higher rate of interest in return for locking your money away for a fixed period of time. The fixed term can vary, and depending on the term you choose, the interest you earn on your fixed deposit can vary as well.
As attractive as they can be, fixed deposits may not necessarily be suitable for everyone. Below are three disadvantages of investing in fixed deposits:
1. No Flexibility to Access Your Funds
Because your money is locked away with the bank, often for months (sometimes years), you lose the flexibility of a regular, day-to-day savings account.
If you do withdraw your money from your fixed deposit account before the agreed maturity date, you will likely be penalised in the form of reduced interest or penalty fees.
2. Relatively Low Investment Returns
Fixed deposits almost always pay a higher interest than a regular, day-to-day savings account. However, because fixed deposits are very low risk investments, they offer lower returns relative to other investment options (e.g. property, shares, bonds etc).
While fixed deposits provide you maximum protection against uncertainty, they offer poor protection against inflation. For example, if your fixed deposit interest rate is at 3.5%, and the current inflation rate is 3%, the value of your money has effectively only increased by 0.5% (i.e. 3.5% - 3% = 0.5%).
3. It Is Not Sexy
Unlike other exotic and risky investments, fixed deposits are safe and boring (not necessarily a bad thing!). Some people may not like the very fact that you know in advance how much profit you will end up earning if you stay on course for the entire investment term. If active participation is what you are seeking, fixed deposit is probably not a suitable investment choice for you.