Fixed deposits are a popular investment option for many people, especially those who are risk-averse and a guaranteed return on their investment. Fixed deposits, also known as term deposits, are a type of investment where you deposit a lump sum of money with a bank or financial institution for a fixed period of time, usually ranging from a few months to a few years. In return, you receive a fixed rate of interest on your investment.
There are several pros and cons of fixed deposits that you should consider before investing your money. Let’s take a closer look at some of them.
Pros of Fixed Deposits
- Guaranteed Returns: One of the biggest advantages of fixed deposits is that they offer guaranteed returns. Unlike other investment options such as stocks or mutual funds, where the returns are subject to market fluctuations, fixed deposits offer a fixed rate of interest that is predetermined at the time of investment. This means that you know exactly how much you will earn on your investment, making it a safe and secure option.
- Low Risk: Fixed deposits are considered to be a low-risk investment option as they are not affected by market fluctuations. This makes them an ideal investment option for those who are risk-averse and prefer a safe and secure investment option.
- Flexible Tenure: Fixed deposits offer flexible tenure options ranging from a few months to a few years. This allows investors to choose a tenure that suits their investment goals and financial needs.
- Monthly Payouts: Some fixed deposit schemes offer monthly payouts to investors. This can be a great option for those who are looking for a regular source of income.
Cons of Fixed Deposits
- Inflation Risk: Fixed deposits are not immune to inflation risk. Inflation can erode the value of your investment over time, reducing the real rate of return on your investment.
- Penalty for Premature Withdrawal: If you withdraw your investment before the maturity date, you may have to pay a penalty. This can reduce the overall returns on your investment.
- Limited Liquidity: Fixed deposits are not a liquid investment option. If you need to withdraw your investment before the maturity date, you may have to pay a penalty and may not receive the full amount of your investment.
Examples of Monthly Payouts and Payouts at Maturity
Let’s take a look at some examples of fixed deposit schemes that offer monthly payouts and payouts at maturity.
Monthly Payouts
Suppose you invest US$ 50,000 in a fixed deposit scheme that offers a monthly payout of 7%. The tenure of the fixed deposit is 3 years. In this case, you will receive a monthly payout of US$ 291.67 for the next 3 years. However, as a resident, you’ll also pay a government tax of 6% on the interest earned, which is US$ 17.50, so the net monthly payout is US$274.17. At the end of the tenure, you will receive the principal amount of US$ 50,000.
Payouts at Maturity
Suppose you invest US$ 100,000 in a fixed deposit scheme that offers an interest rate of 8%. The tenure of the fixed deposit is also 3 years. In this case, you will receive a payout of US$ 124,000 at the end of the tenure, which includes the principal amount of US$ 100,000 and the interest earned on it. The tax to be paid on interest earned is again 6% (if you’re a resident in Cambodia) amounting to US$ 1.440, which means US$ 22.560 is your net profit.
Conclusion
Fixed deposits are a safe and secure investment option that offer guaranteed returns. They are ideal for those who are risk-averse and prefer a low-risk investment option. However, they may not offer high returns and are not immune to inflation risk. It is important to consider the pros and cons of fixed deposits before investing your money. Additionally, it is important to choose a fixed deposit scheme that suits your investment goals and financial needs.
