Many people think that keeping money in the bank on a regular basis is a safe and highly profitable way, but in reality, if you don't understand the risks and regulations, you may lose some or even all of the interest, and you may not even get your principal back at any time. This article will analyze these risks and regulations in detail to help you better understand the pros and cons of fixed deposits.
Fixed deposits usually have a higher interest rate than demand deposits, but this comes at the expense of liquidity. If you place a fixed deposit and the market interest rate rises, you may lose some or even all of the interest. Because the interest rate on fixed deposits is fixed, and rising market interest rates will lead to increased returns from other investment methods, thus reducing the attractiveness of fixed deposits. Another risk of fixed deposits is liquidity risk. Once you have deposited a fixed deposit, you lose the right to get your principal back at any time. If you need money urgently during the deposit period, you can only choose to withdraw it early, which usually results in a loss of interest. In addition, if you are depositing a long-term fixed deposit, such as 5 years or 10 years, then you may be exposed to the risk of inflation during the deposit period. If the inflation rate is higher than your deposit rate, then your real purchasing power will decrease.
Although bank fixed deposits are a relatively safe way to invest, there is still a certain amount of credit risk. If the bank goes bankrupt or has financial problems, your fixed deposit may be affected. Although banks have a deposit insurance system, this system also has certain restrictions and conditions, such as a limit on the amount of compensation, and the compensation time may also have to wait for a long time. If you need money urgently during your time deposit and have to withdraw it early, the bank will usually calculate interest based on the current deposit rate, which is much lower than the interest rate of the original time deposit. This means that you are not only losing the gains of the high interest rate, but also the loss of principal and interest.
Many banks will enable the automatic rollover function by default when customers make fixed deposits. If the customer does not withdraw the money in time after the deposit matures, the bank will automatically transfer the principal and interest to the next fixed deposit period. This has the advantage of avoiding the risk of losing interest on the customer because they forgot to withdraw their money. However, if the market interest rate has fallen after the maturity of the deposit, the interest rate on the auto-rollover fixed deposit will also decrease, which will cause the customer to lose some or even all of the interest.
Although the risk of a bank going bankrupt is small, there is still a certain possibility. If the bank goes bankrupt, your fixed deposit is protected by the deposit insurance system, but this system also has certain restrictions and conditions. According to the regulations, the deposit insurance system only pays a maximum of $500,000 per account, and the compensation time may also take a long time. This means that if you have a deposit amount of more than $500,000 or have a high liquidity need for funds, then a fixed deposit may not be the best option.
To sum up, although fixed deposits can bring relatively high interest rate returns, there are also certain risks and limitations. Therefore, it is important to carefully consider your own capital situation, investment objectives and risk tolerance when choosing a fixed deposit. If you do not understand these risks and limitations or do not think you can afford them, then you may need to seek a more suitable investment approach for you.