What is a Term Deposit? Are FD and Term Deposits the same?

When thinking about safe and reliable investment choices in India, options like “Fixed Deposit” (FD) and Term Deposit take the centre stage. Though these are commonly used terms there’s often a mix up about whether they mean the same thing or not. This article aims to explain the key comparisons between the two so that you can make a smart investment choice.Understanding a Term DepositWhen you open a Term Deposit, you put a specific amount of money in a bank for a fixed tenure known as the “term.” Throughout this time, your money grows at a fixed interest rate that doesn’t change with the market fluctuations.Once the term ends you get back the money you initially invested (the principal) along with any interest earned on it. Investors who value stability and reliability often opt for term deposits to secure a risk-free return.Important Features of a Term DepositHere are the features which make Term Deposit a reliable investment option:When you start a term deposit account at a bank, the duration of the deposit is determined at the time of deposit. You have the option to select a duration which aligns with your financial objectives and can range from a span of a few months to a longer stretch of several years. After you finalise the duration for your term deposit, your funds get locked-in for that particular period.When you start a term deposit account the interest rate stays the same for the entire investment duration, which offers reliability since your earnings are not impacted by market ups and downs or economic shifts. For example, when market interest rates go down after you start your term deposit, you will still receive the agreed-upon interest rate.A major feature that attracts individuals to term deposits is the promise of assured returns on their investment. Having a fixed interest rate in place for the duration of the term deposit ensures that investors are aware of the amount they will receive upon maturity. It makes term deposits a favoured choice for investors who value security and reliability over potentially high yield investments.Term deposits are usually designed to be kept until the selected period ends. However, banks like ICICI Bank offer the option for premature withdrawal if you require access to your money before maturity. The choice to withdraw offers allows flexibility in emergencies so that you have access to your funds, however it’s crucial to strategise before accessing the term deposit to prevent incurring penalties.Term deposits are often viewed as a safe choice as they are not affected by the fluctuations of stock markets or mutual funds which makes them a stable option with returns that appeals to those seeking stability and aiming to steer clear of riskier investments.Understanding a Fixed DepositICICI Bank offers investors an option to open a Fixed Deposit with fixed returns at competitive interest rates. In this, a lump sum of money is deposited with a bank for a certain length of time which is a safe and secure investment. The longer you hold the money, the bigger the returns, and the interest is paid out either at the end of the period or at regular intervals. It’s a low-risk method of gradually increasing your savings.Features of a Fixed DepositHere are the benefits of FD which make it a popular investment option:A key benefit of opting for a fixed deposit is the higher interest rate it offers compared to a standard Savings Account. FDs generally provide higher interest rates as you commit to keep your money deposited for a specific duration of time. Banks such as ICICI Bank provide attractive FD rates, especially for Fixed Deposits held over longer periods.FDs offer an exceptional benefit when it comes to interest payouts as you have the freedom to decide how often you receive it, whether monthly, quarterly or half yearly. Another option is to go for an FD where the interest is reinvested and compounded over time to give you a larger lump sum at the end of the term.FDs have the advantage of allowing you to utilise your deposit as security for a loan. This feature is offered by banks like ICICI Bank at attractive interest rates for loans against FD holdings. It allows you to access funds without needing to break the FD and incur penalties for early withdrawal.Auto-Renewal and ReinvestmentFDs provide the benefit of renewal where your deposit will renew for the same duration if you do not withdraw the funds at the end of the FD term, a feature that is particularly useful for investors seeking to earn interest without having to actively oversee their investments.Banks like ICICI Bank offer tax saving FD accounts which provide tax advantages according to Section 80C of the Income Tax Act. By putting your money into these FD accounts, you are eligible to receive a tax exemption of a maximum of Rs. 1.50 Lakh in one year.Comparing Fixed Deposit and Term DepositLet’s take a look at the key differences and similarities between Fixed Deposits and Term Deposits in India-AspectFixed Deposit (FD)Term DepositDefinitionA specific type of term deposit where money is deposited for a fixed tenure and earns interest.Any deposit where money is held for a specific period, which can include FDs and other deposits like RDs.Interest RateFixed interest rate for the entire tenure.Fixed interest rate for the tenure (same as FD in most cases).TenureRanges from 7 days to 10 years.Similar tenure as FDs, usually a few months to several years.WithdrawalPremature withdrawal possible with penalties.Premature withdrawal is also possible, similar to FDs.RiskLow-risk, assured returns.Low-risk, assured returns.Usage in IndiaCommonly refers to bank deposits with a fixed tenure.Often used as a broader term that includes FDs.ConclusionICICI Bank provides a convenient online term deposit account opening and FD account opening procedure with various options to match your requirements perfectly. Remember to use the FD interest calculator to gauge your earnings and make a thought out choice wisely. Opting for a prolonged FD investment can help in expanding your wealth while giving you assurance through assured returns.