A long term deposit is an investment where an individual places money in a financial institution to earn a fixed interest rate. These investments are often seen as safer than investing in stocks or company issued bonds. Selecting the best long term deposit depends on the financial institution offering the investment, terms for withdrawing the money, available lengths for deposits and minimum deposit amounts. Because these investments are typically conservative in nature, the need for diversification is low with these investments.
Like any investment, opening a long term deposit account means looking at the financial institution behind the deposit account. For example, financial institutions engaging in extremely risky investments can put the funds invested into deposit accounts at risk. If the financial institution ails, then the conservative investor can lose her entire account at that institution. One way to mitigate this risk is to invest funds into banks secured by government backing. This acts as a type of insurance, where investors have a security blanket for invested funds. Choosing a long term deposit in a non-secured bank can result in a risk of loss for invested funds.
Deposit accounts used for investment typically have restrictions for withdrawing funds. While this money still remains the property of investors, they must forgo withdrawing their funds in order to earn the interest payments offered by the bank. Selecting the best deposit account may involve making sure the account has an option for early withdrawal in case of an emergency. A financial institution may or may not allow the investor to keep the earned interest even though the investor withdraws the funds early. These accounts are more preferred as investors have more control over their funds and the account.
Long term deposit account restrictions generally last for a few months, although the account terms can require funds be left for more than a year. Typically, accounts with longer terms should have greater opportunities for earning interest. This is the risk-reward trade-off for investment. Individuals are not too willing to invest funds if they do not receive adequate compensation. Investors looking for shorter terms will often have a stronger desire for deposit accounts available for a few months. This allows the investor to earn some interest while retaining the most flexibility with their funds.
Another possible benefit with these accounts is the ability to remove funds without going below a minimum account balance. This adds flexibility to the investment and helps individuals have more control with their funds without sacrificing the interest earned in the account.