Fixed-term investments, the main takeaways

Discover the characteristics of fixed-term deposits.
Sometimes it's hard to find the best way to make your savings work for you. Although many products have this same goal, not all of them offer sufficient guarantees to adapt to the needs of the most conservative savers. In these cases, putting money into a fixed-term investment is a good option, since fixed-term deposits guarantee the repayment of the amount invested, along with interest. The keys to this financial product are explained below.
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What is a fixed-term investment?

With a fixed-term deposit or time deposit, the customer deposits a certain amount of cash at a financial institution for a specific period of time. Once this period has elapsed, the bank has to return the amount lent to the investor, along with the previously agreed interest. When investing in this financial product, the amount of the deposit, its term and the interest rate are all known from the outset. The interest can also be received on a regular basis during the life of the deposit, such as monthly or quarterly.

From the bank's perspective, this product works as a loan in which the bank is the borrower. Therefore, in addition to offering a chance to customers to make money on their savings, they are a key component in how traditional banking works, since they provide funds to banks.

Everything you need to know about fixed-term deposits.

Before investing in a financial product, you should learn its main characteristics. In the case of a fixed-term investment, the key aspects to consider are the investment term and capital, liquidity, returns and security.

  • Investment term and capital: The maturity date or term indicates how long the capital has to remain invested in the deposit. The deposit can normally be withdrawn before the maturity date, although penalties are usually applied on the interest paid. The minimum amount to invest varies from one bank to another, while the maturity can be short (3-12 months), medium (2-5 years) or long term (10 years or more).
  • Liquidity: deposits are designed to be held until maturity, although the money can normally be withdrawn in advance, albeit with lower returns. If you invest in a deposit, try not to withdraw the money early, although many savers get peace of mind from knowing they can get their money back in an emergency.
  • Returns: one of the main draws of fixed-term deposits is that they ensure a certain return that is specified in advance. Every deposit specifies the interest payable, which can be used to compare different deposits and choose the one that offers the highest yield. There are two important concepts in this regard: the nominal interest rate (NIR) and the annual percentage rate (APR). Although the NIR indicates the returns that the bank pays on the deposit, the number to compare when evaluating the various deposits is the APR, as this indicates the actual returns after the expenses and fees are subtracted. It also provides a common basis for comparing products with different maturities. Generally, the longer the term and the more money invested, the greater the return on the deposit. However, it is important to know that the returns on this product are usually rather limited and very closely linked to the official lending rates. In today's very low rate environments, the returns are very low or zero.
  • Security: since the return is pre-determined and is part of the contract, this investment product has practically no risk. Deposits guarantee the return of the initial investment plus the agreed interest at the maturity of the term. In order to protect savers from hypothetical solvency problems, deposits are guaranteed by the Deposit Guarantee Fund for up to 100,000 euros per person and bank.
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Differences with other savings and investment products

When evaluating the characteristics of fixed-term deposits, it is useful to compare them with other savings and investment products. One product that is frequently compared to deposits is an investment fund, although there are considerable differences between the two. Most investment funds have higher potential returns, although, except for certain guaranteed funds, these returns are by no means assured. As a result, this product has a higher risk. However, investment funds offer significant advantages, such as high liquidity and transfers between funds not being subject to taxes.

Pension plans are similar to investment funds, though in principle, they are intended for a very long-term investment: since they are intended to save for retirement, user can't withdraw their money until they stop working or unless certain conditions occur, such as illness or disability. Its main advantage? Contributions offer tax incentives, which allow for significant savings on the annual tax return.

Finally, there are savings plans, which are essentially a deposit but with different conditions than fixed-term deposits. They have the advantage that the returns are exempt, provided they are maintained for a minimum of five years. They also guarantee at least 85% of the investment, with the rest being invested in fixed-income assets or equities. It is therefore a less secure product than fixed-term deposits.

Investing money on a fixed-term basis is a good option if you are looking for a safe investment, although the interest paid by this investment is usually rather low. At BBVA, we offer a wide range of savings and investment products for all types of savers. Visit bbva.es or go to any BBVA branch to find out all about it and choose the one that best meets your needs.

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