If you are active in the field of banking and finance, then you need to be aware of difference between demand deposits and time deposits. Here’s what you need to know.
Bank deposits have always been amongst the preferred ways of investment for investors across the world. On the bank deposits, you can get fixed interest which can help you satisfy your liquidity needs. Also, the risk associated with such bank deposits is much less as compared to that prevalent in stock markets and mutual funds. Time deposits with banks are suggested by many investment advisers and so are demand deposits. This comparison of time deposits vs. demand deposits will guide you in the right manner.
Time Deposits
Time deposits are also known as term deposits or fixed deposits in some countries, are deposits in banks or financial institutions for pre-decided or fixed period of time. The depositor is promised a fixed rate of interest for the said period by the financial institution. However, there are some restrictions for the depositors as far as withdrawing money is concerned. In the time deposits, it is not possible to withdraw money before the stipulated time of investment and if it is to be done, then he has to pay a penalty to the financial institution.
The depositor is also required to give a written notice to the financial institution when he wishes to withdraw his money from the deposit. Banks have some policies regarding interest for these deposits. The longer time deposit you opt for, the more would be the rate of interest offered to you. Once the duration of the term deposit is over, you can either withdraw your money or opt for the deposit scheme again. The rate of interests earned in these deposits is more than that offered on savings accounts, and less than that earned through long term equity investments.
There are 3 types of time deposits which have been explained below:
Traditional Certificates of Deposits
The investment period of the traditional certificates of deposits can be between one month to five years. Withdrawal before maturity can lead to a deduction of penalty by the financial institution. The Federal Deposit Insurance Corporation insures certificate of deposits issued by banks
Broker Bought Certificate of Deposits
These deposits are first bought by brokers from banks and are then sold to the common customers looking for investments. In such CDs, you have options of keeping money invested for as little as 7 days and also for more than a year
Liquid Certificates of Deposits
The best thing about the liquid CDs is that depositors can withdraw their money at any point of time without penalty charges. Thus, this is an extremely flexible investment option for all kinds of investors. However, the amount of money which you can withdraw without penalties is decided by the banks
Demand Deposits
In the case of demand deposits, the depositor is free to withdraw his funds from the account which he holds with the bank any time, without giving any notice to the bank for the withdrawal. So they are exactly the opposite that of the time deposits. Though getting back funds fast is the main advantage of demand deposits, the major disadvantage is that fees charged for these accounts are higher and interest rates offered are not good enough. So, these deposits would be the best option for people who need money in a few days or months. On the contrary, long term investors should go for time deposits which would yield higher returns.
There are 3 types of demand deposits which have been explained below:
Money Market Accounts
Money market accounts are those in which the interest paid to the depositors is never fixed and can change every day. Though these accounts give higher returns than the saving accounts, changing interest rats may put depositors at loss at times. Fees charged for these accounts are low
Checking Accounts
Checking accounts generally do not pay interest to the depositors and the fees charged for such accounts are usually high. These accounts are ideal for businessmen who nee immediate funds for completing transactions of purchasing goods
Savings Accounts
Savings accounts are the most popular type of demand deposits. Interest is paid at a fixed rate for these accounts which is lower than that on time deposits. Fees are not charged for savings accounts by banks and if charged, they would be quite low
The financial markets and financial products of this generation are advanced and consumer-friendly. So, as a smart investor, you should take advantage of these investment opportunities to meet your wealth creation targets.