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SELECTING THE RIGHT DEPOSIT ACCOUNT

By Vivek Risal

In Nepal, there are currently 27 Commercial Banks, 82 Development Banks, 36 Finance Companies, 48 Micro-Finance Institutions and an endless number of Cooperatives in operation. And when you multiply the number with the scores of deposit account schemes that each company offers, it is inevitable for a layman to become confused. With each company competing for your attention, denizens are spoilt are choice. When an individual first starts to manage money at their disposal, you may not be certain which deposit account is apt for you. When deciding on the kind of accounts you want to put your money into, there are various options. The following is a list of basic accounts with interest bearing that you can park your cash along with the advantages and disadvantages.

Savings Account
Inevitably, a savings account is the first official account held by an individual. The objective of opening a savings account may differ. A parent may open an account in the name of a child with the sole purpose to encourage a pattern of savings to be utilised in some future date. Teenagers may open an account to stash cash for future purposes. Since Nepal is a remittance dependent economy, an account in the name of an individual may be created to transfer funds from an income source from abroad. Apart from all objectives, a savings account establishes a working relationship with a financial institution. A normal savings account is simple to comprehend for individuals looking to park their savings. However, savings account yield a low-interest rate in comparison to the other accounts. This very drawback forces the individuals to change their account type seeking higher interest rates.

Fixed Deposits
Also known as “Termed Deposits” and “Time Deposits” in some nations, fixed deposit accounts require an individual to deposit without withdrawals for a fixed period of time. In return, the organisation promises an interest rate which is normally higher than the offered interest rate in a savings account. Interest payment is normally accrued at the maturity of the tenure ensuing huge amount additional. It ensures that the account holder saves money for future transactions. This type of account is used when the account holder requires meeting a future cash flow of a considerable amount. A major advantage is that the compounding of interest through which the interest on interest gets accrued is provided to the individual on the maturity date. These accounts are also termed as the ‘safest place to invest’ as investments in other instruments will require constant research and the learning curve is steeper. Fixed Deposits allows an individual to just sit back and relax and wait for the returns. Fixed deposit accounts are also highly liquid. A corresponding account holder can withdraw the money whenever they want but a clause regarding such withdrawal and the additional fees is mentioned prior on signing of documents. The offered interest rates are normally lower than the inflation rate of a country. Fixed deposit accounts require no active participation from the investor leading to a passive investment which is termed good or bad depending on the investment culture prevailing.

Certificate of Deposits
Certificate of Deposits (CDs) is a deposit account offering a higher interest rate… higher than traditional savings account for a locked period of time. If interest rates go up, the account holder will be stuck with a lower interest rate and you will lose accumulated interest rate if you withdraw the money beforehand. However, most account holders consider this type of account for emergency needs. The brighter side of opening CDs is that the account holder will earn more by locking it up with higher interest rates. On the other side, a penalty fee is levied when you pull out the funds earlier than the maturity period. The penalty amount might wipe out the rest of the generated amount.

Conclusion
When it comes down to selecting an account type, numerous factors drive the decision. To open an account which meets your needs, an individual should start by asking few questions:
How much money can I deposit at the very beginning?
How often will I access the account?
What are the offered interest rates?
How important are the interest rates?
By dwelling on the answers, you will be able to narrow down the search to the only account you require. With the right account in place, saving for your future will become a lot easier.