What are disadvantages of fixed deposit?


Quick Answer

The primary disadvantages of fixed deposit investments are the lack of flexibility to access funds and the relatively low return on investment. The funds are illiquid and cannot be withdrawn from a bank whenever the owner wants. The low return on investment is tied to a correspondingly low risk; fixed deposit investments are much safer than many other investments.

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Full Answer

Fixed deposit instruments are usually known as time deposits or term deposits in Australia, Canada, the United States and New Zealand; they are called bonds in the United Kingdom. They pay a slightly higher interest rate than standard savings accounts, and are very safe investments that do not allow active participation by the investors.

With a fixed deposit investment, the investor knows exactly how much profit he will earn when he makes the investment. The investor deposits money in a fixed deposit account for a pre-agreed period of time. He must pay penalties if he withdraws the money before that time period is over. Fixed deposit time periods vary; they can be as short as one week or as long as 10 years. Interest is paid at set intervals, typically once per quarter. Upon the date of maturity, investors have the choice of withdrawing their money or rolling it over to extend the investment for the same term and interest rate.

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