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Factors in Investing Fixed Deposits

written by: Jason C. Chavis•edited by: Laurie Patsalides•updated: 3/28/2010

When choosing to place your money into an account with a secured interest rate, its important to understand the factors in investing fixed deposits. While these investment options can be highly beneficial to the investor, like all forms of financial securities, there is a certain amount of risk.

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    What are Fixed Deposits?

    Fixed deposits are a way of investing a certain amount of money with a guaranteed fixed interest rate rather than a fluctuating return. The main influencing factors in investing fixed deposits is the type of currency used in the transaction, the length of time the deposit will be held and the location of the deposit. Generally, fixed deposits cannot be withdrawn for a particular period of time, usually five year increments. Unlike other types of investments, there is no way to withdraw the funds for any reason, even by paying a penalty or in case of emergency.

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    Benefits and Drawbacks of the Investment

    Factors in investing fixed deposits that draw people to them as well as away depend greatly on the situation of the investor. This particular form of investment is particularly beneficial to those needing to set aside money for a limited amount of time. Plus, during periods of market volatility, fixed deposits will ensure guaranteed profits that cannot be changed due to fluctuations in interest rates. However, its obvious that both of these benefits can be considered drawbacks under certain circumstances as well. Since the interest rate does not fluctuate, during periods of high yield rates, the investor fails to make the best use of his or her money.

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    Loan Advantages

    One of the major factors in investing fixed deposits is that banks generally give preferential treatment to the investors of these accounts. Due to the fact that there is essentially an insured deposit in their coffers, the lending institution will be able to issue a loan to individual or entity backed by the deposit. However, it should be noted that many times, the interest rate on the loan offsets the interest generated from the fixed deposit.

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    Foreign Currency Fixed Deposit

    In regards to foreign currency, this is one of the best ways to make a strong return on the investment. An entity can establish a type of fund called a Foreign Currency Fixed Deposit (FCFD). This allows the investor to choose what type of currency he or she would like to use while holding the deposit. While this adds a new level of risk to the investment, it can also be highly profitable in regards to return. Some countries' currencies rise in value faster than others, especially when dealing with developing nations. For example, during the late part of the 20th and early 21st centuries, Chinese yuan increased in value much faster than the American dollar. This currency can then be converted once the deposit period ends. Again, exchange-rate should be taken into account during this period as well.

    Overall, the factors in investing fixed deposits make it one of the best options for a conservative approach or one in which a determined time period is known. The rate of risk is negligible, while the return is basically guaranteed. This also makes it a wise choice for certain types of needs such as college or retirement funds.

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    Resources

    "Invest in Fixed Deposit" Plan Your Investment: http://www.thinkplaninvest.com/2008/12/invest-in-fixed-depositfd/

    "Benefit of Fixed Deposit Accounts" Economy Watch: http://www.economywatch.com/banking/deposit-account-rates.html