Demand Deposit Vs Fixed Deposit 

Putting your money in banks or similar financial institutions is intrinsic to your financial planning. Deposits in banks have been the most popular investment options in India for their extensive reach, security, convenience, and returns. First, however, you must know about demand and fixed deposits among the many bank accounts to suit your financial planning goals.

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Demand and fixed deposit represent the two fundamental deposit account types to help you fulfill your financial needs.  The primary difference between the two accounts is in terms of accessibility and interest-earning. Let us take a closer look at them in some detail. 

What are Demand Deposits?

As the name suggests, demand deposits allow you to withdraw money on demand freely at any time. Thus, your demand deposit account is equivalent to ready cash and liquid. The Indian bank’s demand accounts are either Savings or Current to match your spending style. While the savings account accumulates funds to tap when necessary, the current account meets your daily finance needs, especially in business. 

What are Fixed Deposits?

A fixed deposit, also known as a term deposit, is locked for a specific period of your choice. Usually, the deposit period varies from 7 days to a maximum of 10 years. You can open a term deposit account in any bank or NBFC to earn higher interest on the investment.  However, you get compounding benefits only for cumulative fixed deposits, while on the others, it is simple. Since your fund is locked for the agreed-upon deposit period, withdrawal is not allowed. 

Who Can Open Deposit Accounts?

All Indian banks allow Indian citizens to open a demand deposit or a fixed deposit account regardless of their residential status. However, the NRI deposit accounts are designated as Non-Resident External (NRE) and Non-Resident Ordinary (NRO), depending on the fund source and repatriation facility. In addition, groups of individuals, HUF, Trusts, Statutory Bodies, and Associations can also open demand deposit accounts, besides corporate entities. 

How Do Demand and Fixed Deposit Accounts Work?

Your demand deposit account provides flexible access not only through cheques but also debit cards. You find its optimum efficacy while withdrawing funds at an ATM, paying bills, and e-commerce purchases.  Thus, you can withdraw your money at any time of the day or night, provided you do not overdraw in the ordinary course. Additionally, you enjoy overdraft protection over transaction denial in exceptional circumstances. 

On the other hand, your fixed deposit is inaccessible during the account tenor. You receive the closure proceeds on its maturity. Interest is paid quarterly and compounded accordingly to help your money grow. The applicable interest rate depends on the fixed deposit tenor. However, with the pre-mature closure of your fixed deposit, you lose interest-earning and pay the penalty. 

Pros and Cons – Demand Deposits and Fixed Deposits

Demand Deposit

Pros

Cons

Any time access to the account to add and withdraw

Restrictions in the Savings account per month withdrawals 

Ideal for daily spending and parking funds

No interest is earned in the Current account

Earn token interest in the Savings account

Unlimited withdrawal transactions in the Current account

Easy to pay bills, recharge utilities, and make online purchases

Fixed  Deposit

Pros

Cons

Invest funds for a tenor range from 7 days to 10 years

The fund investment is locked up for the specified tenors

Earn higher interest than demand deposits to help money grow due to compounding

Pre-mature withdrawal results in financial loss

Loan facility available against pledge of fixed deposits.

Multiple choice of accounts either in cumulative or non-cumulative options

What to Choose Between a Demand Deposit and Fixed Deposit Accounts?

A demand deposit account like savings is necessary for your daily spending needs, whether groceries or paying bills. Additionally, you benefit from government-sponsored direct benefit receipts into the account. Finally, it is flexible enough to accommodate your multiple financial needs. 

On the contrary, your fixed deposit is a safe option for parking your funds aligned to your financial goals through higher returns. It is ideal to find a balance between the two – ensure liquidity through a demand deposit account and help money grow through the fixed deposit account.

In Conclusion

You have an eclectic choice in demand deposits and fixed deposits in Indian banks and financial institutions. The clinching factor is juxtaposing your specific financial goals with your income. Ideally, both the demand deposit and fixed deposit accounts have a definite place in your financial plan. Therefore, you must make an informed choice for a blend of demand deposit and fixed deposit matching your financial goals best. 

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Written By: PolicyBazaar - Updated: 01 December 2021
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