Fixed Deposit vs. Demand Deposit: What's the Difference?

A demand deposit is a savings account from which you can withdraw your money on demand. In other words, the demand deposit permits you to withdraw funds freely at any given time. Because of this reason, the money deposited here equals ready cash or liquid money, similar to a savings account.

A demand deposit is a wise option to park your money as it generates interest income. While the interest is fixed and announced by the bank, they are subject to change, even during the investment tenure. However, such changes are rare and often don’t have a significant impact.

One feature that makes demand deposit an excellent option for conservative investors is its low-risk benefit and instant liquidity. Since there is no market linkage, your money remains secure from market volatility.

A fixed deposit, also known as FD, is an investment option where you can invest a specified amount of money for a fixed amount of time. FDs are mainly offered by banks and Non-Banking Financial Institutions (NBFCs). FDs have become one of India’s most popular investment options due to people’s trust in banks.

FDs come with a fixed interest rate and maturity period. The fixed interest rate ensures that the income the investment generates remains fixed, making FDs a low-risk investment option.

In most cases, the interest generated by an FD is reinvested back into the corpus, and hence, the compounded corpus starts to generate interest. Further, you can withdraw the whole corpus at the end of the maturity period.

However, unlike the demand deposit, you will not be allowed to withdraw money before maturity. Even if prevailing circumstances necessitate premature withdrawals, a penalty will be levied.

Both FDs and Demand deposits have their advantages and disadvantages of investing. The points mentioned below are some to consider before investing in both.

Fixed Deposit

Demand Deposit

The first significant difference between the two is in the withdrawal procedures. You can access the demand deposit anytime sans any obligations, whereas FD can only be accessed after maturity. Moreover, you will have to pay penal charges if you withdraw the FD before maturity.

The interest rate for a demand deposit lies between 4 to 6%, depending on the bank you choose to put the money in. On the other hand, the interest rate on a fixed deposit can go up to 7 to 9%. In short, FDs tend to give you superior returns, but the obvious trade-off is the lock-in period and liquidity. While the fixed deposit has a fixed term, a demand deposit doesn’t.

The following table describes the difference between demand and fixed deposits in detail.

There are generally two kinds of demand deposits that a bank provides. The first and the most popular is a savings account where you can park your money/savings without many obligations. Apart from a few withdrawal limitations, you can access the money anytime. You will also earn a fixed interest for the money you deposit.

The second type of demand deposit is a current account. This one is mainly used by people engaged in business and has higher minimum balance requirements compared to a savings account. In both cases, you can withdraw the money at any given point.

On the other hand, when it comes to fixed deposits, the money is deposited until a specific period, and the account is closed on maturity. Hence, FDs are a wise investment option for long-term deposits.

While premature FD withdrawals attract penalties, you can avail of credit cards or loans using your FD in case of urgent liquidity issues.

Demand and fixed deposits come with their share of merits and demerits; these are some of India’s most common and traditional investment options. Both work great for risk-averse investors looking to diversify their portfolios. From an investment perspective, however, fixed deposits appear more attractive as they offer a higher interest rate and better returns.

A robust savings portfolio will help you become financially secure in the future. Given that there are plenty of choices, the key lies in selecting an investment option that matches your investment horizon and risk appetite. Hence, ensure you do your research before choosing an investment option.