Term deposits, as we will explore in this article, are known for their reliability. Follow along to get the basics on this low-risk option for investing your money.
What Is a Term Deposit?
A term deposit is a deposit of a lump sum of money that is held at a financial institution for a fixed term. Let’s take a closer look at the essential facts:
- An amount of money is invested for a fixed length of time at a fixed rate of interest. For example, you may receive interest at 5.5% on a $50,000 deposit with a 24-month term. It’s that simple.
- It is a very safe investment. At an Authorised Deposit-taking Institution (ADI), it is guaranteed by the Australian Government for up to $1 million. Note that this cap, which is per person and per ADI, will be reduced to $250,000 from 1 February 2012.
- However, you may not have free access to your money. You may pay a fee or receive a reduced interest rate if you withdraw your money early (this varies, so check with your deposit provider).
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Purchasing a term deposit is relatively straightforward. After comparing term deposit rates, online or at your local financial institutions, you can invest your money whenever you’re ready, locking in the offered interest rate for the term. Overall, a term deposit is a simple, practical investment option.
Why Choose a Term Deposit?
For the most part, a term deposit is preferred by cautious, risk-averse investors. However, a term deposit or term deposits investment strategy (such as “laddering” multiple term deposits) can play a useful role in many investment portfolios.
Becasue term deposits are guaranteed the Government (as long as the term deposit is held with an ADI), your money is as safe as it gets in the world of investments. This makes a term deposit a valuable type of investment – commonly considered one of the lowest-risk investments there is. Many investors choose term deposits for retirement savings or for their long-term investment goals.
As alluded to earlier, term deposits can be valuable for more aggressive investors, too. If you are going to invest in some high-risk options, you may want to balance those risks with safer options so as not to to “put all your eggs in one basket,” and certainly not all in a risky basket. Thus, a term deposit may form a secure foundation for your finances even if higher-risk investments are less than successful.
There are some drawbacks to term deposits:
- Lack of access to your money, as described earlier
- You can’t expect the rate of return, on average, to compete with other investment options. Stocks and other types of investments may earn considerably more than a term deposit. Then again, they may also earn less if the market goes against you.
- If you don’t withdraw your money out of the term deposit when the term is over, it may be rolled over into a new term deposit. This means two things: that your money is once again invested for a fixed term with potential penalties for early withdrawal, and that this new term deposit may have a lower interest rate than the first.
Learn a little about how to compare term deposit rates and understand how term deposits fit into your financial plans. You’ll find a lot of useful information on this site to help you decide whether a term deposit may be of value to you.
