Are you thinking about investing in fixed deposits in Sri Lanka? Then this is the only guide you need to read. By the end of this post, you’ll know everything you need to know about investing in fixed deposits.
Not only that. You’re going to learn
- Why I’m not a big fan of investing in fixed deposits
- The biggest mistake most of us make when investing in fixed deposits and
- What to do when fixed deposit rates are low
First, let’s learn what a fixed deposit is.
What is a fixed deposit?
I’m sure you already know what a fixed deposit is because it’s one of the most popular investments in Sri Lanka.
Whenever you find a bunch of money lying around, the first thing our parents do is open a fixed deposit in a local bank.
How does a fixed deposit work?
Fixed deposits are fixed by nature. Sometimes they are called term deposits as well.
Because you invest your money for a term.
The term can be a month, 2 months, 3 months and can go on until 60 months.
Basically, you’re handing over your money for a fixed term and you get an interest based on the term you select.
The more months you leave your money with the bank, the higher the interest you would get. That’s how a fixed deposit works.
What to consider when selecting a fixed deposit?
Even though investing in fixed deposits is pretty straightforward, there are a couple of things you need to consider.
This is the first thing you need to check before investing in a fixed deposit. What’s the interest you can get? Keep in mind that different banks offer different rates based on the term you select. Compare the rates with a couple of banks before selecting.
Period (or term)
The investment term depends on your goals. Is it a short-term or a long-term goal? You need to consider when you’d need that money. For example, if you need money within 12 months, you can’t select 60 months as your investment period.
Minimum or maximum deposit
In certain fixed deposits, there can be a minimum or a maximum deposit. Make sure to ask about “terms and conditions” before selecting a fixed deposit.
Can you withdraw money before maturity?
While the nature of a fixed deposit is “fixed,” certain banks allow you to withdraw money before maturity. These fixed deposits are sometimes called “Flexi deposits.”
But keep in mind that it comes with a cost. You’ll be able to withdraw your money but they would charge a transaction fee or something similar.
Some banks even let you borrow money against a fixed deposit.
Let’s say that you invest all your life savings in a fixed deposit and suddenly you need some money. In a situation like that, you can get a loan against your fixed deposit. But keep in mind that it will be for a higher loan interest rate.
Why I’m not a big fan of investing in fixed deposits?
Even though fixed deposits are very popular in Sri Lanka, I’m not a big fan of them. There are 2 reasons why I don’t invest in fixed deposits.
Fixed deposits are fixed
When you hand over your money, you’re not going to get it until maturity. I don’t want my money to be stuck in a specific account for a specific time. I like to have flexibility with my money. I like to have the freedom to withdraw whenever I want.
You can invest regularly
Let’s you want to invest Rs.5000 every month. You can’t do that. You can’t add regular amounts to your investments. I usually invest a certain amount every month and I can’t do that with a fixed deposit.
Those are the 2 reasons why I’m not a big fan of investing in fixed deposits.
One of the best alternatives for fixed deposits is unit trusts. If you want to learn more about how to invest in units, read this ultimate guide.
Is investing in fixed deposits bad?
Not at all.
If you have a bunch of money lying around and if you feel like you won’t be needing them in the short-term, you can invest in a fixed deposit.
The biggest mistake most of us make when investing in fixed deposits
Fixed deposits offer you the option to withdraw interest income either monthly or annually. Most of us happily withdraw it without giving a second thought.
While there’s no harm in it, you’re going to miss on the compounding interest income.
Let’s look at an example.
You invest Rs.1,000,000 in a fixed deposit for an 8% annual interest rate for 5 years.
Your annual interest is Rs.80,000 (1,000,000 x 8%)
If you withdraw your interest at the end of each year, you’ll earn Rs.400,000 (80,000 x 5 years) as interest income from your fixed deposit.
If you leave your interest income without withdrawing annually, you’re going to earn interest for the interest income you earn each year. This is what’s known as compound interest.
Based on the above example, if you didn’t withdraw your interest income, you’ll have Rs.1,469,328. That’s Rs.69,328 extra interest income.
Whether you invest in fixed deposits or anything else, the only way you make money is with the compounding effect. So don’t withdraw your interest income. Leave it in the account to compound. That’s how you make money in fixed deposits.
What to do when fixed deposit rates are low?
Interest rates don’t stay the same. Based on government monetary policy, they change from time to time.
When interest rates are high, you can invest in fixed deposits. But what to do when they are low?
Then you need to find alternative investments. That’s what professional investors do. They allocate money to other assets. One example is investing in stocks.
Keep in mind that there are no easy answers for these types of questions.
It depends on so many things like your investment goals, how much you’re expecting from your investments, what’s going on in the country etc. The best thing to do is hold on while interest rates climb or find an alternative investment.
That’s it. That’s all you need to know about investing in fixed deposits in Sri Lanka. If you have a question, make sure to add them below.
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