You will mostly have two broad options when it comes to bank deposits. One is to put your money into a fixed-rate product. The second is a variable-rate product. Either way, you’re looking at a predetermined interest rate. The difference is that with a fixed-rate product, the rate and your return are guaranteed for the term of the deposit. With a variable-rate product, the rate isn’t guaranteed. Most people, and especially those who are risk-averse, should go with the first option. Here’s a more in-depth look.
Guaranteed Return with Fixed Deposit Rates
A fixed deposit rate guarantees a return for a specified term. You know with absolute certainty how much interest you will earn, and this rate stays constant until the deposit matures. This kind of stability is particularly good and beneficial during uncertain economic times, when variable rates might walk up but can just as easily drop down, leaving depositors with not-so-secure return rates. Yet, with the Fixed Deposit, you have the peace of mind that comes with banking on an “asset” that will give you a certain boost six months down the road, instead of one whose outcome might be in flux.
Protection from Falling Interest Rates
Selecting a fixed deposit interest rate safeguards your investment against falling interest rates. In times of economic turmoil or when central banks are cutting rates, we have seen that variable-rate products can take a nosedive, and the money put into these vehicles may yield only subdued returns. By choosing a fixed-rate product, you assure yourself a defined, no-surprises return and put your money out of reach from the kinds of rate drops we’ve experienced in the recent past. This is particularly valuable in low-interest-rate situations, where rates just barely exceed inflation.
Financial Planning Made Easier
A fixed deposit gives you clarity in financial planning. You can count on the interest rate you receive based on the depository receipt. This is especially helpful for returns needed in a long-term plan. You can compute the overall amount of money you’ll have access to in the future, whether several years down the line or at the time of your retirement.
Lower Risk for Risk-Averse Savers
People who avoid risk are more likely to profit from fixed deposit rates. These rates offer a low-risk investment opportunity because your capital is secure, and your return is predetermined. With a variable rate, you’re at the mercy of the marketplace, which can sometimes lead to disappointingly low returns. While there’s a chance that such rates might grow and provide you with a sunnier return, the unpredictability makes them a poorer choice for just-in-time access to cash.
Minimal Management Needed
A fixed deposit account is an easy and simple way to save. After you decide on the interest rate and deposit the money, you don’t have to watch the market or make any changes. Your money grows at the agreed rate with hardly anything needing to be done. In contrast, if you have a savings account with a variable interest rate or if you have invested elsewhere, it is often necessary to keep up with market trends and central bank policies. If interest rates drop, you need to be ready to move your money to avoid an undesirable return. Fixed deposit rates are free from this kind of management hassle.
Conclusion
To sum up, although both fixed and variable rates have their places in the financial world, a fixed deposit rate is often the better choice for those desiring stability, predictability, and low risk. It offers peace of mind during times of economic uncertainty and allows for financial planning without constant market monitoring. For growing your wealth, a fixed deposit remains a reliable and dependable method.
