Fixed-Term Deposit: What It Means and Why It Might Be Advantageous

In the world of savings and investments, the terms "deposit account" and "fixed-term deposit" (or restricted account) are often confused, despite referring to financial products with crucial differences.

Understanding what a fixed-term deposit means is the first step to optimizing your savings and choosing the most suitable instrument for your financial goals.

The Definition: What Does Fixed-Term Deposit Mean?

A fixed-term deposit (also known as a term deposit or restricted account) is a type of deposit account that involves the immobilization of capital for a predetermined period (the "term"), in exchange for a higher and generally fixed interest rate.

In practical terms, the "term" is a contract in which you, the depositor, agree not to withdraw or move the deposited sum before the agreed-upon maturity date.

• Restricted Capital: The deposited amount is not available for daily use (withdrawals, transfers, payments) throughout the duration of the term.

• Fixed and Better Rate: The bank, in exchange for the guarantee of being able to use your liquidity for a certain period, grants you a higher interest rate compared to normal savings accounts or non-restricted deposit accounts.

• Fixed Duration (Term): The deposit has a defined maturity, which can range from a few months (e.g., 6 or 12 months) to several years.

But in practice: what is a Fixed-Term Deposit?

The Practical Example

Suppose you want to set aside 20,000 CHF that you are certain you won't need for the next 12 months.

1. Unrestricted Account: If you leave it in a "non-restricted" deposit account, you might get a rate of 1.00% and be able to withdraw it at any time, but the return is lower.

2. Fixed-Term Deposit: If you choose a fixed-term deposit for 12 months, the bank might offer you a guaranteed rate of 1.50%. By accepting the term, you lock up the 20,000 CHF: you won't be able to touch it for 12 months, but you will receive a higher return at the end.

The Everyday Analogy: Booking a Flight

Imagine wanting to buy a plane ticket:

• Flexible Ticket (Unrestricted Account): Costs more, but allows you to change the date or cancel the trip at any time. You have maximum freedom, but you pay a cost (a lower interest rate).

• Non-Refundable Ticket (Fixed-Term Deposit): Costs less (or offers you an advantage, a higher rate), but you must commit to flying on that date. If you change your mind and cancel, you lose the advantage. In this case, the advantage is the better rate, and the commitment is the non-liquidity of the capital.

Pros and Cons: Fixed-Term Deposit vs. Unrestricted Deposit Account

The choice between the two types of deposit accounts is based on the balance between return and liquidity.

Feature	Fixed-Term Deposit (Restricted)	Unrestricted Deposit Account
Interest Rate	PRO: Generally higher and fixed for the entire duration of the term.	CON: Generally lower and often variable (may follow market fluctuations).
Capital Liquidity	CON: Capital locked until maturity. Early withdrawal incurs penalties and the loss of accrued interest.	PRO: Capital can be withdrawn or used at any time, without penalties or special notice periods.
Security and Predictability	PRO: Guaranteed fixed rate, ensuring a predictable return, regardless of future interest rate movements.	CON: The return may decrease if the bank decides to lower the rates.
Ideal for...	Savings for medium-term goals (e.g., car purchase, renovation) or funds you are certain you won't need.	Emergency fund, immediately available liquidity, sums intended for short-term expenses.

In Conclusion

If you have a sum of money that you can immobilize without the risk of needing to use it prematurely, the fixed-term deposit is the instrument that allows you to transform waiting into an additional gain thanks to a more advantageous interest rate.

The key is planning: only restrict funds that exceed your emergency fund.

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