If you have a large sum of money available, then you may be considering various alternatives to invest them for good returns. Some of the safest ways to go about these can either be through fixed or demand deposits. Each of them has its own set of benefits and disadvantages that can cater to your varied requirements.
For instance, these could differ in terms of liquidity, accessibility, earnable interest, and more. Read on to learn more about demand deposit vs fixed deposits and their differences below.
Fixed Deposits, also known as term or time deposits, are funds deposited for a set period of time and can range from a few days to several years. You earn interest at a predetermined rate for the chosen tenor.
Funds deposited in FDs tend to feature higher interest than savings accounts, and those with longer tenors usually have higher interest rates.
On maturity, you will be given the choice of either withdrawing the deposit amount along with interest or starting another FD cycle with the same funds.
Compared to fixed deposits, demand deposits tend to provide much more ease of access and liquidity, but give lower interest rates and charge various account handling fees. One major benefit of such deposits is that you can freely withdraw funds without any prior notice or penalties.
Some examples of demand deposit accounts are savings accounts, money market accounts and checking accounts, among others.
Here are the major distinguishing factors between fixed deposits and demand deposits:
Particulars |
Fixed Deposits |
Demand Deposits |
Meaning |
These are accounts in which deposits are held for a set period of time at a predetermined rate of interest |
These are accounts through which you can withdraw funds at any point of time, without any prior application or notice |
Objective |
Help provide a secure way of growing funds over a fixed period of time |
Ideal for those who wish to have steady access to their money for different financial activities |
Interest Rates |
Tend to offer higher interest rates compared to demand deposits |
Offers lower interest rates in exchange for liquidity |
Cheque Utility |
Not allowed |
Allowed |
Tenor |
Can range from 7 day to 10 years |
No such requirements as deposits are available for regular use |
Types |
Regular FD, senior citizens FD, Tax saving FD, Corporate FD and more. |
Savings accounts, checking accounts and money market accounts |
Taxation |
Tax saving FDs can help save taxes up to ₹1.5 Lakhs under Section 80C of the Income Tax Act, 1961 |
No taxes applicable on DDs |
Liquidity |
Low liquidity as funds are usually locked in for a specified period of time, but can be prematurely or partially withdrawn with certain penalties |
Highly liquid with no penalties or charges incurred |
Flexibility |
Usually not flexible due to fixed tenor |
Highly flexible as funds can be added or withdrawn anytime |
The choice between a fixed deposit and demand deposit depends mostly on your financial objectives and liquidity requirements.
While demand deposits offer easy access to funds but lower interest rates, fixed deposits offer comparatively higher interest rates but limited access to your funds. Fixed deposits lock in your funds for a fixed term. However, you can make premature withdrawals in the case of FDs by paying a penalty.
Hence, it would be wise to consider your goals and risk tolerance to determine which is better for you.
Now that you have a much better understanding of demand deposits vs fixed deposits, you could use the same to help you make better investing decisions based on your financial requirements. Don’t wait any further and get started with opening an account of your preference!