Bank deposits are one of the most familiar and accessible ways for most people to invest. In fact, to invest your money in a bank deposit you only need to study the rating of banks and the deposits offered by the selected bank. No special knowledge is required here and regular monitoring of the market situation is also out of the question in most cases.
Object of investment in bank deposits
The object of investment in this case is a deposit – that is, an account opened in the name of the depositor and offering an annual increase in the invested funds by a predetermined percentage. Many depositors are attracted by the stability and clarity of the conditions offered by banks for deposits. The interest rate on the deposit is unchanged and a person can always calculate in advance what profit and by what time he will receive it. If reliable bank is chosen, then most of the negative economic factors (affecting, for example, the work of Forex traders) will not affect the deposit and will not entail the lack of profit or loss of the investor. Therefore, deposits in bank deposits remain one of the main areas of private investment.
Another plus is that you can invest almost any amount. Of course, the larger the amount, the greater the profit, but the minimum entry threshold is quite low-so anyone can afford this method of additional income.
Classification of investment in bank deposits
All bank deposits can be divided into several groups depending on the following criteria.
Term of placement of funds. There are two main types of deposits: “on demand” and “urgent”. Deposits of the first type allow the investor to withdraw funds from the account at any convenient time. As a rule, the interest rate on these deposits is much lower – so the bank tries to insure itself in case of an unexpected withdrawal of funds by a large number of depositors. In addition, in most “demand” deposits, the accumulated interest is partially lost when withdrawing money from the account. The interest rate on term deposits is usually higher. The longer the placement period and the larger the amount that the depositor leaves on the deposit, the greater the return on the deposit. For term deposits, the amount and term are determined in advance. There is no possibility to replenish the deposit and you can withdraw funds only after the specified period. The term of placement of funds varies from several months to several years and the interest rate on term deposits is in the range of 7-12% per annum. We can also distinguish the third type of deposits – “urgent”with the possibility of partial withdrawals and deposits. For such deposits the account should always have an irreducible balance (a pre-agreed amount) and the interest rate is slightly lower than that offered for term deposits.
Type of currency. The profitability of deposits in foreign currency other than in euro or dollars is lower – because of the lower interest rate. It is also possible to place funds on a multi-currency deposit, taking into account the amount of investments in different currencies separately. For such deposits most often there is also an irreducible balance and in addition you can convert currencies among themselves at the current exchange rate of the Central Bank.
Type of interest rate. The interest rate on the deposit can be not only fixed but also floating (changing depending on stock indices, fluctuations in the economic situation, etc.). For such deposits, the bank sets a minimum percentage of profitability (usually quite low), and the maximum percentage can be several times higher than for a term deposit. It is difficult to predict the profit on such deposits but it can be noticeable with a successful combination of circumstances.
Goals and objectives of investing in bank deposits
The main goal when investing in bank deposits is to find a reliable bank and choose a deposit with good conditions and a high interest rate (preferably not lower than 9-10% per annum).
The reliability of banks can be checked by rating – for example the annual Forbes bank rating offers reliable data.
Unfortunately, practice shows that many reliable banks have lower deposit rates than more dubious ones. Therefore it is best to stick to a certain golden mean when choosing a bank, choosing banks that actively issue loans. Here everything is quite simple: the more loans the bank issues, the higher the inflow of funds and the more opportunities the bank has to raise interest rates on deposits. The reliability of such banks is ensured by the fact that the bank receives enough profit from issuing loans and it does not have to deal with “gray” operations, so the risk of closing the bank is very, very low.
If the depositor has a large amount of funds in his hands, it is better to distribute them among several deposits.
Methods and risks of investing in bank deposits
In which case and which deposit will bring the greatest return?
- If you need a stable and sufficiently high income it makes sense to pay attention to term deposits in dollars, giving preference to longer-term offers.
- If the deposit amount is not too large and you can take a risk then you should pay attention to deposits with a floating interest rate. The yield will be lower but there is also a chance to unexpectedly get a high profit.
Many banks offer their customers holiday deposits timed to major holidays (New Year, Chrismas, etc.). Rates on such deposits are usually slightly higher but the term of registration of deposits is limited.
The main risk when investing in a deposit is an unexpected closure of the bank. In addition an unforeseen situation may occur in which the depositor urgently needs all his funds from the deposit – most banks leave the accumulated interest for themselves when withdrawing deposits early and there is no question of profitability for the depositor in such cases. If there is at least a small risk of such circumstances it is best to put the funds in an account where interest will be accrued on the balance. Fixed assets from such a deposit can be withdrawn at any time and interest will be accrued at the end of the month on the remaining amount on the account.
Deposits in foreign currency are a rather risky step. Despite the lower interest rate on such deposits you can get a good profit with a sharp jump in the exchange rate. However, the opposite situation is also possible – and when opening such a deposit constant monitoring of the current economic situation and timely response will be required.
Result of investing in bank deposits
Of course investing in bank deposits cannot be considered a panacea. The interest rate (especially now) rarely exceeds the level of inflation – which means that the profit on the deposit will be leveled by inflation. Therefore, it is hardly possible to talk about deposits as a permanent and only source of financing.
However, this method should not be completely discounted. Deposits are one of the least risky types of investment of available funds. There are various deposit insurance programs that allow bank customers to receive their funds even in the event of bankruptcy or unexpected closure of the latter. Of course, a deposit can ensure not only the safety of funds but also at least a small but stable income.