The Best Ways to Use a Fixed Deposit as Part of Your Investment Portfolio
A fixed deposit is one of the first tools people consider when they want to save money, especially if they are risk-averse. Although the returns are limited, fixed deposits play an important role in any balanced investment portfolio.
The key question for many investors, however, is: How can you effectively use a fixed deposit instead of it just being a frozen amount?
What is a Fixed Deposit and Why Do People Use It?
A fixed deposit, or time deposit, is a sum of money you place with a bank for a specific period in exchange for a fixed, pre-determined return. These deposits are often fully protected and are not affected by market fluctuations, making them a safe, low-risk investment tool.
Many people use fixed deposits because they prioritize safety or want to maintain readily available liquidity without exposing their money to the risks of stocks, real estate, or other ventures.
Is a Fixed Deposit a Smart Investment?
On its own, a fixed deposit, while secure, is not enough to build significant wealth or achieve long-term financial growth.
However, when used as a component of your overall investment portfolio—and not as a standalone tool—it becomes a smart element that helps reduce risk and achieve financial balance.
How to Use a Fixed Deposit Smartly Within Your Portfolio
1. Use a fixed deposit as a liquidity reserve.
Having a fixed amount in a short-term deposit helps you handle any financial emergency without needing to sell other investments at an unfavorable time, such as during a market downturn or a drop in real estate prices.
2. Link the fixed deposit's return to covering some of your expenses.
If your portfolio generates monthly or annual income, the returns from a fixed deposit can provide a stable income stream to cover some basic expenses. This gives you financial stability and reduces pressure on your other investments.
3. Diversify between short- and medium-term deposits.
Instead of putting a large sum into a single deposit, split it across different terms (e.g., 3 months, 6 months, 1 year). This gives you flexibility and access to funds if needed or when a better investment opportunity arises.
4. Make a fixed deposit as a complement to higher-risk investments.
If you have investments in stocks, sukuk, or real estate funds, including a fixed deposit in your portfolio provides balance. It helps mitigate the impact of market volatility on your overall returns.
5. Monitor interest rates and time your deposit wisely.
When interest rates are high, fixed deposits can be an excellent opportunity to boost the overall return of your portfolio. Therefore, it's wise to follow central bank decisions, such as those made by SAMA, as they have a direct impact on interest rates.
The Impact of Rising Interest Rates on the Demand for Fixed Deposits
In recent years, Saudi Arabia has seen a significant increase in interest rates, which has made fixed deposits more appealing to investors, especially those looking for low-risk options.
The interest rate on deposits reached a 33-year historical high, leading to a substantial increase in demand for fixed-term deposits in Saudi banks. This trend reflects investors' awareness of the importance of leveraging high interest rates to enhance their portfolio's total return.
When is a Fixed Deposit Not the Right Choice?
If you're looking for rapid capital growth or an investment that clearly outpaces inflation, relying solely on fixed deposits will not be the ideal choice. However, if you use them in the right context, they can be a crucial support tool within a larger portfolio.
Conclusion
A bank fixed deposit is not a tool for making large profits, but it is a smart tool that can be used to enhance financial security, provide liquidity, and achieve a balance between return and risk.
The secret is not in the deposit itself, but in how you use it. When it's part of a comprehensive investment plan, it improves your portfolio's efficiency and increases your ability to handle market fluctuations with confidence and stability.
FAQs
1. Is a fixed deposit considered a smart investment?
Yes, but it's a low-risk, low-return investment. It's most effective when used as part of a diversified portfolio to provide security and liquidity, not to generate large profits.
2. Can I break a fixed deposit before its maturity date?
Yes, you can, but you may lose part of the return or not receive it in full, depending on the bank's terms. Therefore, it's best to set a term that aligns with your needs.
3. Are the returns from a fixed deposit enough to counter inflation?
Generally, no, especially during periods of high inflation. It's recommended to use a fixed deposit to protect a portion of your money while directing the rest to higher-growth instruments like sukuk or funds.
4. What's the difference between a fixed deposit and a savings account?
A fixed deposit is locked for a specific period with a fixed, usually higher, return. However, it offers less flexibility for withdrawals, unlike a savings account, which allows easy access to funds.
5. How do I use a fixed deposit within an investment portfolio?
By making it a supporting element for stability and liquidity. It should be used to cover emergencies or to balance out higher-risk investments like stocks or real estate funds.
