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Fixed Deposits and Savings Accounts: Saving money is an important part of financial planning because it helps people secure their future, fulfill their goals, and deal with unexpected expenditures. It gives people a sense of financial security and allows them to achieve their goals. Understanding the different choices available for saving money is important. Fixed Deposits and Savings Accounts is also one of the top 10 assets in Nepal. In this post, we will look at the differences between fixed deposits and savings accounts, which are two common ways to save money.

What is a Fixed Deposit Account?

Fixed deposits, also known as term deposits, are a type of investment offered by banks and financial institutions. In a fixed deposit, individuals deposit a specific amount of money for a predetermined period at a fixed interest rate. The deposited amount remains locked, and interest accrues on it until the maturity date. 

How does it work?

When you open a fixed deposit account, you agree to keep a certain amount of money with the bank for a specified period, which can range from a few months to several years. The bank pays you a fixed interest rate on your deposit, which remains constant throughout the tenure. At the end of the tenure, you receive the principal amount along with the accumulated interest.

Tenure and interest rates:

Fixed deposit tenures vary depending on the bank and individual preferences. Some banks offer tenures as short as 7 days, while others provide options for several years. The interest rates on fixed deposits are typically higher than those offered by savings accounts, and they may vary based on the tenure and prevailing market conditions.

Advantages of Fixed Deposit Account:

  • Guaranteed returns:

One of the primary advantages of fixed deposits is that they offer guaranteed returns. Unlike other investment options affected by market fluctuations, the interest rate on fixed deposits remains fixed for the entire tenure. This stability provides individuals with a predictable income stream.

  • Higher interest rates compared to savings accounts:

Fixed deposits generally offer higher interest rates compared to savings accounts. This higher interest rate helps individuals grow their savings faster and accumulate more wealth over time.

  • Fixed investment period for disciplined savings:

Fixed deposits have a predetermined tenure, which encourages disciplined savings. By committing to a fixed investment period, individuals are less likely to withdraw funds impulsively, helping them build a habit of regular saving.

Disadvantages of the fixed deposit account

  • Liquidity constraints:

Fixed deposits have limited liquidity since the funds are locked for a specific tenure. Withdrawing funds before maturity often incurs penalties, and in some cases, it may not be allowed.

  • Penalty for premature withdrawal:

In the event of an emergency or the need for funds, premature withdrawal from a fixed deposit can lead to penalties. These penalties reduce the overall returns on the investment.

  • Inflation risk:

Fixed deposits may be susceptible to inflation risk. If the inflation rate surpasses the interest rate earned on the deposit, the purchasing power of the savings may decrease over time.

Considerations Before Investing in Fixed Deposits:

  • Assessing your financial goals and investment horizon:

Before investing in a fixed deposit, it’s crucial to assess your financial goals and investment horizon. If you have short-term goals or anticipate the need for quick access to funds, a fixed deposit may not be the most suitable option.

  • Evaluating interest rates offered by different banks:

Different banks offer varying interest rates on fixed deposits. It’s advisable to compare the rates offered by different banks to ensure you maximize your returns.

  • Comparing different tenure options:

Consider the tenure options available and choose one that aligns with your financial goals. Longer tenures often offer higher interest rates, but they may restrict access to funds for an extended period.

Taxation on Fixed Deposits:

  • Tax implications on interest income:

Taxes must be paid on interest earned on fixed deposits. It is taxed using the right income tax slab rates as part of the individual’s total taxable income.

  • TDS (Tax Deducted at Source) on fixed deposits:

Banks deduct TDS on the interest income earned from fixed deposits. The TDS deduction rate is typically 10%, however, it can change depending on the person’s income and tax burden.

  • Strategies to optimize tax liability:

Individuals can reduce their tax burden on fixed deposits by extending their investments across many financial years, investing in tax-saving fixed deposits, or making use of tax exclusions and deductions.

Savings Accounts:

A savings account is a basic banking product that allows individuals to deposit and withdraw funds while earning a modest amount of interest. It provides a safe place to store money and facilitates everyday transactions.

What is a savings account?

A savings account is a type of deposit account offered by banks. It provides individuals with a safe place to store their money while earning interest on the deposited amount. Savings accounts come with various features and benefits that make them an attractive option for individuals to manage their finances.

Types of savings accounts:

Banks provide many types of savings accounts to meet the unique demands of individuals. These may include regular 

  • Savings accounts
  • High-interest savings accounts
  • Joint savings accounts
  • Specialized savings accounts for specific purposes like education or retirement.

Key features and Benefits (Advantages) of Saving Account

  • Accessibility and liquidity:

Savings accounts provide easy access to funds. Account holders can withdraw money through various channels such as ATMs, online banking, or visiting the bank branch. This liquidity makes savings accounts suitable for emergency funds or day-to-day expenses.

  • Safety of funds:

Deposits in savings accounts are generally insured by deposit insurance schemes provided by governments or regulatory authorities. This ensures that even in the event of a bank failure, a certain amount of money is protected.

  • Earning interest on idle money:

One of the significant advantages of savings accounts is the opportunity to earn interest on idle money. While the interest rates on savings accounts may be relatively lower than those on fixed deposits, they still provide individuals with some returns on their savings.

Disadvantages of Savings Accounts:

While savings accounts offer various advantages, they also have some limitations that individuals should consider:

  • Lower interest rates compared to other investment options:

The interest rates on savings accounts are generally lower compared to fixed deposits or other investment avenues. Individuals seeking higher returns may find other investment options more suitable.

  • Impact of inflation:

The relatively low interest rates on savings accounts may not always keep pace with inflation. Over time, the purchasing power of the savings may decline, affecting the overall growth of wealth.


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Choosing the Right Savings Account:

  • Minimum balance requirements:

Different savings accounts have varying minimum balance requirements. It’s essential to choose an account that aligns with your financial capacity and offers a minimum balance requirement that you can comfortably maintain.

  • Transactional limits and charges:

Consider the transactional limits and charges associated with the savings account. Some accounts could have limitations on the number of free transactions or charge fees for certain types of transactions.

  • Additional features and benefits:

Apart from the basic features, savings accounts may come with additional features and benefits such as free debit cards, online banking facilities, rewards programs, or overdraft facilities. Assess these features and benefits to choose an account that suits your needs.

Interest Rates on Savings Accounts:

1. How interest is calculated:

Interest on savings accounts is typically calculated using the daily or monthly average balance method. The interest is usually credited to the account every quarter.

2. Understanding nominal and effective interest rates:

Savings accounts may advertise a nominal interest rate, which is the rate before considering compounding. The effective interest rate considers the compounding frequency and provides a more accurate measure of the returns.

3. Factors affecting savings account interest rates:

Savings account interest rates are influenced by various factors such as the prevailing economic conditions, monetary policies, and competition among banks. The interest rates can vary across different banks and change over time.

Differences Between Saving Account and Fixed Deposit Account:

Savings accounts and fixed deposits have distinct characteristics that set them apart, here is the difference between Savings accounts and fixed deposit account

FeatureFixed DepositsSavings Accounts
TenureFixed maturity periodNo fixed maturity period
Interest RatesHigher interest ratesRelatively lower interest rates
LiquidityLimited liquidity, penalties for premature withdrawalHigh liquidity, immediate access to funds
RiskLower risk, guaranteed returnsSubject to market risks and inflation
PurposeLong-term savings and investmentShort-term savings and daily banking
FlexibilityLimited flexibility, locked-in periodHighly flexible, no lock-in period
ReturnsAssured returnsModest returns on idle funds
AccessibilityLimited access during the tenureImmediate access to funds
Insurance CoverageNot insuredInsured by deposit insurance schemes
Investment HorizonSuitable for long-term goalsSuitable for short-term goals
Interest CalculationFixed interest rate throughout the tenureCalculated based on average daily balance
TaxationTaxable, subject to applicable tax ratesTaxable, subject to applicable tax rates
Inflation ProtectionLimited protection against inflationVulnerable to the impact of inflation

Savings Accounts vs. Fixed Deposits: Which is Better?

Choosing between a savings account and a fixed deposit depends on individual financial goals and preferences. Consider the following factors when making a choice:

  1. Risk tolerance and financial goals:

A savings account may be a better alternative if you have a low-risk tolerance and short-term goals. 

Fixed deposits, with their higher interest rates, are more beneficial to those with a longer investment horizon and are ready to lock their savings for a certain time.

  1. Liquidity needs: 

Analyze your liquidity needs. A savings account might be a better option if you expect to need rapid access to money shortly. 

A fixed deposit, however, might offer better rates if you have extra money that you can afford to put away for a set length of time.

  1. Flexibility:

Savings accounts provide you with options when it comes to using your money and carrying out transactions.

Fixed deposits, on the other hand, do not permit frequent withdrawals or transactions throughout the investment period. When choosing, take into account your requirements for ease and flexibility.

  1. Risk and return:

Fixed deposits are a low-risk investing choice since they provide guaranteed returns. 

Savings accounts may contain some risk because the earnings are based on market swings, although they are comparatively safer than other investing options. When deciding between the two, consider your willingness to take on risk and your preference for steady returns.


Fixed Deposits and Savings Accounts – FAQs

Which is the best fixed deposit account in Nepal?

According to the data of Jul 16, 2023, these are some of the fixed deposit options available from different banks and financial institutions. • Narayani Bikas Bank - Fixed Deposit Above 1 Year: Interest Rate: 11.60% Minimum Balance: None Tenure: 1.08 years • Green Development Bank - Fixed Deposit Above 1 Year: Interest Rate: 11.50% Minimum Balance: None Tenure: 1.08 years • Corporate Bikas Bank - Fixed Deposit: Interest Rate: 11.25% Minimum Balance: 100 Tenure: 6 months • Nepal Finance Company - Fixed Deposit Above 2 Years: Interest Rate: 11.25% Minimum Balance: None Tenure: 2.08 years

What is a fixed deposit account and saving account?

A fixed deposit account is a type of investment account where individuals deposit a specific amount for a fixed period at a fixed interest rate. A savings account is a basic banking account that allows individuals to deposit and withdraw funds while earning a modest amount of interest.

What is the interest rate for FD in Nepal?

Interest rates for FD differ from bank to bank. Some of the highest interest rate providing banks are Narayani Bikas Bank, Green Development Bank, Nepal Finance Company, Everest Bank and so on.

Which is the highest FD rate?

Narayani Bikas Bank provides an interest rate of 11.60% on fixed deposits above 1 Year of tenure i.e. 1.08 years, according to the data of Jul 16, 2023.

What is better than FD?

There are several investment options that may be considered better than fixed deposits, depending on individual preferences and financial goals. These options include stocks, mutual funds, real estate investments, and government bonds. It is essential to research and consult with a financial advisor to find the best investment option for specific needs and risk tolerance.

How are interest rates calculated in savings accounts?

Interest in savings accounts is typically calculated based on the average daily balance in the account. The interest earned is usually credited to the account on a monthly or quarterly basis.

Can I withdraw money from a fixed deposit before the maturity period?

Withdrawing money from a fixed deposit before the maturity period may come with penalties or reduced interest rates. It is important to carefully consider the tenure before investing.

Conclusion:

In conclusion, saving money is crucial for financial stability and achieving our goals. By understanding the differences between fixed deposits and savings accounts, we can make informed decisions tailored to our financial needs. Fixed deposits offer guaranteed returns, higher interest rates, and disciplined savings, but come with liquidity constraints and inflation risk. Savings accounts provide accessibility, safety, and the opportunity to earn interest on idle money, but with relatively lower interest rates. By building a balanced portfolio, setting financial goals, budgeting, and maximizing returns with smart saving habits, we can make the most of our savings and pave the way for a secure financial future. Start saving today and make informed choices to unlock the full potential of your money.

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