Fixed-term Deposits In Times Of Low Interest Rates

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Fixed-term deposits play an important role in the accumulation of wealth for many people. For a long time, investment advisors advised that part of the savings should be deposited in a fixed-term deposit account. A fixed-term deposit was even considered a sensible component for retirement provision.

However, this situation has changed fundamentally: The days when investors could look forward to a welcome bonus when opening a new account are over. Fixed-term deposits have lost a considerable part of their appeal due to the dramatic collapse in interest rates . What are the consequences for you as an investor?

Time deposit: what is it?

With a fixed-term deposit, you invest cash in a special account for a previously agreed period of time. That is why one speaks of “time deposit”. During this period you will forego direct access to your money. In return, the bank guarantees you a fixed interest rate for the entire term; the interest is then credited to your fixed-term deposit account.

A comparison of fixed-term deposits, overnight deposits and savings bonds

Fixed-term deposits have long been recommended as a short to medium-term investment. Put cash assets as a fixed deposit in, you should be aware that you can not have your money during the conditioning period. As a rule, a certain minimum deposit is required for the fixed-term deposit. The investment amount is also limited, the maximum deposit varies from bank to bank.

Fixed-term deposits: Fixed-term deposits, overnight deposits and savings bonds in comparison

The savings bond works in a similar way to the fixed-term deposit: Here, too, you invest a minimum amount of money at a fixed interest rate for a certain period of time. However, savings bonds usually have a longer term and are therefore less flexible than fixed-term deposit accounts. Just like the fixed-term deposit account, a call money account is a pure interest account. Unlike with fixed-term deposits, however, with overnight money you have access to your capital at any time and without notice. However, you have to accept an even lower interest rate for this.

What different terms are offered for a fixed-term deposit?

The term fixed-term deposit is no coincidence: In the fixed-term deposit, all conditions – investment amount, term and interest rate – are firmly agreed. You choose the investment period yourself; one often hears about fixed-term deposits for 1 year, 5 years or even 10 years. Regardless of the duration you choose, the following generally applies: If the investment is longer, there is often a little more interest in the current phase of low interest rates. Anyone who expects market interest rates to rise again soon should not commit their money for too long in order to be able to quickly switch to more attractive offers if the interest rate level actually develops positively.

Termination of the fixed deposit account: What happens if the money is urgently needed before the term expires?

As a time deposit saver, you leave your money to the bank for a fixed period of time, but you receive slightly higher interest than for a call money or savings account. Unless there are important exceptional reasons or the contract expressly allows for early termination, you cannot cancel a fixed-term deposit during the term. The bank alone then decides whether to release the required amount anyway as a goodwill gesture, but as an investor you must expect loss of interest, administrative and cancellation costs in this case.


Bad interest rates: is the time deposit still paying off?

Fixed-term deposits can be a very interesting investment product for savers as long as 2 conditions are met:

  • Security: Since you have no access to your assets, the time deposit must be protected against possible bankruptcy of the credit institution during the investment period.
  • Attractive interest: The money you invest generates the profit exclusively from the fixed deposit interest . With a long investment period, you as an investor also benefit from the compound interest effect, which increases your income.

What does this mean for you as an investor? Since the fixed deposit interest depends on this development, for the near future, whether investing in fixed deposits or overnight deposits, you would have to allow for very low interest rates. You will therefore get very little return on your money, and some banks are even talking about negative interest rates for larger cash assets.

Inflation destroys the purchasing power of fixed-term deposits

The zero interest rate policy has enormous implications for savers who invest their assets in fixed deposits. If you park cash in a bank account at the low fixed interest rates customary in the market during these times, the savings will in fact continue to lose value due to inflation.

Time deposits in the interest rate trap: How to avoid the risk

The low interest rates have two negative effects. On the one hand, the compound interest effect cannot develop over the investment period. On the other hand, inflation reduces the purchasing power of invested cash. Both of these together transform fixed deposits from a safe investment option into a problematic one. How can investors react to this interest rate trap?

It is not that difficult to find a suitable investment that can develop well. Instead of interest gains, rely on dividends and the chance of price increases. You have a chance of these returns if you invest your money in securities such as stocks or funds. However, do not forget that there is a risk of total loss when building capital with securities.

Independent of fixed-term interest: wealth creation with funds and stocks

If you want more returns on your money, you can invest in securities. Shares, bonds, certificates or funds offer greater earnings opportunities, but also a higher risk due to possible price losses. Such “volatile” securities are particularly suitable for investors who want to achieve more returns than with minimal interest-bearing overnight or fixed-term deposits and who are prepared to accept losses in return.

How to Invest in Securities

Investing money in securities is easier than many people think. All you need is a securities account for administration: it gives you a quick and precise overview of the status of your papers. You can use the order mask to buy and sell funds and stocks online.

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