What is fixed deposit?
As fixed deposit or time deposit money on the deposit accounts is called for, a period of time at a fixed rate is applied. There are short-term fixed-term deposits with terms from 30 to mostly 360 days and longer-term deposits with terms of up to ten years. It is not uncommon for time deposit accounts to be opened with a minimum investment amount, which often ranges between USD 2,500 and USD 5,000.
Who is fixed deposit suitable for?
Time deposits are particularly suitable for people who only invest a few years and do not want to take any risks. Because of the high level of security, the returns are usually lower than those of riskier securities. Fixed-term deposits are also a good building block for mixed investment portfolios.
Which term should investors choose for fixed-term deposits?
Usually within the negotiated time frame, fixed-term deposits cannot be cancelled. According to certain financial websites, in periods of very low interest rates it is best not to make fixed-term deposits for too long terms. Otherwise, as interest rates increase again and the market offerings get stronger, you couldn’t respond flexibly. That’s the reason. This claim is logical at first glance. However, after a closer examination, it proved to be a confusion.
In principle, short terms are advantageous when interest rates rise, and long terms are advantageous when interest rates fall. However, it is unknown how the interest rate level will develop after a fixed-term deposit account has been concluded. If interest rates are very low compared to the past, most people assume that interest rates will have to rise again in the future. But this is a mistake. Even if the interest rate level is already very low, it can fall further, as the past decade has shown. As early as 2007, many professional investors thought that interest rates could not fall any further. In fact, they continued to decline in the years that followed. In 2012, for example, at a very low interest rate level, it was advantageous to take out long-term fixed-term deposit contracts. Because interest rates kept falling.
Investment strategies with time deposits
Those who choose either short or long terms are also placing a bet on the development of interest rates. Investors who do not want this should spread their fixed-term deposits over different terms. With this system, often referred to as the “interest rate staircase” , you can quickly participate in rising interest rates and achieve an average return in the medium term. For example, divide into four equal parts the sum you want to spend. Spread the money over time deposits with terms of one to four years . In this way, a fixed deposit is due every year. If you invest the money again with a term of four years, this rhythm continues. Of course, you can also increase the term. This is especially worthwhile if the interest rate differences between the terms are large.
But there is a more convenient strategy than the interest rate ladder: You invest half of the capital in overnight money , the other half in fixed-term deposits with a three-year term or longer. With this strategy, the average interest rates are as high as with the interest rate ladder. When interest rates rise, the interest rate ladder yields higher returns because investors benefit from better fixed-term deposits every year. If interest rates fall, on the other hand, the overnight money strategy is ahead. It is also more flexible because half of the money is available at all times.
Investors have to cancel many a fixed-term deposit account
There is also an important difference at the end of the term. Some banks then transfer the investment amount and income unsolicited to the customer’s current account. However, you must terminate other contracts before the deadline expires. Otherwise, the bank or savings bank will reinvest the money with the same term as before – at the then current conditions. So that you are protected from surprises here, you should study the modalities before signing a fixed-term deposit contract. You should beware of combination offers. Some providers lure customers with high fixed-term interest rates and at the same time oblige them to buy other investments, such as a fund . Those who do not need such additional financial products should not be blinded by high interest rates. This also applies to other lure offers that are tied to unfavorable secondary conditions.