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What are Fixed Deposits?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 March 2014
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    2003-2014
    Conjecture Corporation
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Fixed deposits are loan arrangements where a specific amount of funds is placed on deposit under the name of the account holder. The money placed on deposit earns a fixed rate of interest, according to the terms and conditions that govern the account. The actual amount of the fixed rate can be influenced by such factors at the type of currency involved in the deposit, the duration set in place for the deposit, and the location where the deposit is made.

The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a specified period of time. In most cases, fixed deposits carry a duration of five years. During that time, the money remains in the account and cannot be withdrawn for any reason. Individuals, corporate entities, and even non-profit organizations that wish to set aside funds and limit their access to the funds for a period of time often find that fixed deposits are a simple way to accomplish this goal. As an added benefit, the monies in the account will earn a fixed rate of interest regardless of any fluctuations in interest rates that apply to other types of accounts.

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However, both these benefits can also turn into disadvantages under certain circumstances. Because the money cannot be withdrawn until the duration is complete, the funds cannot be used even in emergency situations. Changes in the going interest rate may also rise to a point above and beyond the interest rate applied to existing deposits. This means account holders are actually earning less interest with fixed deposits than with other types of loans and accounts.

While the interest rate on fixed deposits cannot be changed, there is sometimes a way to work around the issue of obtaining use of funds in an emergency situation. At times, the lending institution where the fixed deposit is placed may be willing to extend a separate loan to the account holder, using the fixed account as collateral. While not ideal, this can at least make it possible to deal with the current financial crunch.

Fixed deposits are a credible way to make a return on investment that is somewhat higher than a standard savings account. The use of fixed deposits can also be helpful when working with various types of currency. By establishing what is known as a Foreign Currency Fixed Deposit or FCFD, it is possible to choose the type of currency involved in the deposit and lock in a rate of interest. If the choice of currency is a good one, this means the investor can enjoy a healthy fixed deposit currency rate for the duration of the deposit and earn more than with a standard fixed deposit strategy. However, going with an FCFD does contain a slightly higher amount of risk, since the funds deposited must be converted to the currency of choice and then converted back when the deposit is fulfilled. If the currency did not fare well in the interim, there is some chance of obtaining a loss, due to the changes in the rate of exchange from the time the fixed deposit was activated until the time the deposit is considered complete.

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Discuss this Article

anon204068
Post 17

If you put a fixed deposit into the bank, in the account balance sheet is it listed under current assets?

anon189792
Post 15

Fixed Deposit is useful for the future. It may help in the future. For example, if you invest in FD after 16 to 17 year for your child it will be very useful for the higher studies investment. Another example: if your child wants to become a doctor in that time, the FD will help. So everybody should invest in FD.

anon184664
Post 14

How does a fixed deposit work? what do you end up buying, do you own part of the company or what? Thanks.

anon160479
Post 11

finance is difficult subject for some, so thanks for posting the "what is fixed deposits" article for people to read.

anon127654
Post 8

Are fixed deposits a good investment option or not?

anon125337
Post 7

Actually, a fixed deposit is a non-current asset.

anon106741
Post 6

Is there any scope for utilising a fixed deposit scheme by low earning income groups, say with an annual income of one lakh?

anon101722
Post 5

Are there a lot of foreign currency schemes on the web stating someone is to inherit euro dollars that can be transformed into a new account in a different country relevant? ( True or False )

win199
Post 4

@leiliahrune - The best fixed deposit interest rate can come from a different bank than the one you're currently using, so you might want to check into that also. Fixed deposits can be great for saving money when you don't think it's possible or simply are having a tough time saving period. It's definitely something to think about right now with the economy and the threat of no more Social Security - you should always have a back up plan.

leiliahrune
Post 3

The great thing about fixed deposits have to be the interest rates. Some fixed deposit interest rates can be as high as 9.5% - that's enormous in the interest rate world. Whenever you have the idea to work with a fixed deposit, just make sure that you find out what the interest rates will be like and you can kick back and watch your money grow over time.

wecallherana
Post 2

@anon98090 - A fixed deposit can be seen as either. While most people will say that a current asset is what's on had and available for spending, you might want to check with a CPA for the full details as it can depend on your situation and where your fixed deposit is being put. If the fixed deposit is still being made, then it's most likely going to be an investment; however, if the fixed deposit process has been completed you're probably looking at a current asset as long as it's accessible to you. Hope that helps you out some!

anon98090
Post 1

Is a fixed deposit an investment or current asset?

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