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What are Fixed Deposits?

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When it comes to investing money there are a number of possible options. One possibility is a fixed deposit account. This is where you invest your money for a set period of time. The fact that you are willing to tie your money up means that you can generally expect to receive higher rewards.

How Fixed Deposits Work

The way that fixed deposits work will very much depend on the arrangements that apply to a particular account. A lot will depend on the amount of time that the money is to be deposited for and the conditions offered by those borrowing this money. When you choose a fixed deposit account you are in fact lending money to the bank for a set period of time in exchange for a predetermined return. These fixed deposits may be used as an investment option for individuals or for businesses.

The thing that differentiates these types of deposits from other kinds of accounts is that it is not permissible to withdraw the money for a set period of time. In most instances you will not be able to touch the money for five years, but this amount of time can vary. This is often a suitable investment option for those people who have some spare cash and feel confident that they are not going to need it until the duration of the fixed deposit is over. The fact that the interest rate is fixed for the time of the fixed deposit means that the individual or company investing the money doesn’t have to worry about interest rates fluctuating.

The Disadvantages with Fixed Deposits

Fixed deposits can be a good option in a lot of cases but there are some disadvantages associated with this investment option. One notable disadvantage is that the money is tied up for a set period of time. We never know what is going to happen in the future and it could be that we suddenly need that money we have put in. The disadvantage then with this type of account is that we can’t even get to our money in an emergency.

Another disadvantage is that the fact that we are protected from fluctuating interest rates could also work against us. If the interest rate in the outside world becomes very favorable then we will miss out on this because our interest rate has already been determined.

The disadvantages to fixed deposits do exist but there are ways to get around them. Some providers may allow you to borrow money on the strength of your fixed deposits.

Should You Choose a Fixed Deposit Account?

A fixed deposit account can be a great option for those people who have a bit of spare cash. There are disadvantages with this type of investment but for most people it will work out advantageously by providing them with more return than they would expect from a normal savings account. It is at least worth considering if you have money that you need for a few years.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.

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