Need a Safe Investment Option? A Simple Guide to Term Deposits
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If the time has come to invest your money, a term deposit may be the answer to your needs. It is certainly a safe option that can provide a worthwhile return on your money.
Used with other investments and an effective savings plan, term deposits have a place that is hard to match with other options. Here is some introductory information you need to know before you choose a term deposit.
The Term Deposit: The “What” and “Why”
A term deposit is an investment offered by an authorised bank, as we will approach in detail in the next section. The investment itself is fixed, where both the rate and term will be set.
Using a term deposit isn’t as casual as a savings account, though. If you absolutely need to access your money before the term is up, you will be charged a penalty. You could lose all interest in a 30-day deposit, or around three months of interest for terms deposits around a year, typically.
Term deposits are great due to the practical absence of risk. You can count on higher rates than more fluid savings/investment options, and it is protected – as we will now see.
Safety of Term Deposits
The Australian Prudential Regulation Authority (APRA) is in charge of regulating financial institutions and similar companies. If you are interested in a term deposit, there is a list of regulated institutions that you can choose from in this regard.
Term deposits are guaranteed by the Federal Government, applicable to both Australian-owned banks and local subsidiaries of foreign institutions. The current guarantee is applicable until October of 2011, where balances of up to $1 million are covered.
It would be advisable to choose an institution that is regulated by the APRA. Overall, a term deposit is a safe investment option, which makes it preferential to property, shares, and other investments (though these can of course earn a higher rate and have separate advantages).
The Next Step – Choosing a Term Deposit
If a term deposit is right for you, the next step is to start comparing rates, as well as deciding on some important factors. Here are some of the main points that should be on your list:
- Choose the term (length of time) of the investment
Generally, the longer the term, the more interest you will be able to accrue. This makes a term deposit great for long-term investments, or when you have a specific date in mind for something (i.e. a wedding or vacation).
- Decide how much money you can invest
As with any investment, it can be tempting to overextend yourself. Resist the temptation; it is better to err in a more fluid location, such as your savings account where you will not strain your short-term finances.
- Compare rates
With the caveat of doing so at regulated institutions, it is best to compare term deposit rates to get the best return on your investment. There could be reasons to go with an institution that doesn’t have the best rate, but those aren’t common – for obvious reasons.
- The fine print
One of those reasons, from the previous entry, could be here. Look at possibilities with regard to their fine print: penalties for early entry are something to highlight, as you need to know what could happen in the worst case scenario.
Looking Ahead
After you’ve done your research and perhaps even started your term deposit, you should know that you need to be aware of once the deposit matures. Along the way, of course, you should receive updates in regards to the interest that is earned.
However, once it matures, you will need to respond if you want your money. Institutions will roll over the term deposit to a new one; if you react too late, you will likely be charged interest (as you are in a “new” term deposit; yes, even if you didn’t want to).
Have a plan ready once the term has been completed. Overall, though, this is a reliable and effective investment that provides a number of nice advantages.
This article is opinion only and should not be taken as financial advice.
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Filed Under: Term Deposits
