In this article we will explain in detail what a fixed-term investment fund is, how to cancel it , its advantages and disadvantages, and how it works.
How to cancel an Investment Fund
The first thing to be clear about in this regard is that profitability will be reduced by canceling a fixed-term deposit in advance. However, it is the only way for you to recover your money before the expiration period established at the beginning. The taxes on the part of the banking entities, for canceling a fixed-term deposit range between 1 and 3% of the profits.
For such purposes and taking into consideration the types of cancellations in advance of a fixed-term deposit, we find:
- Total cancellation. Which is nothing more than the recovery of the total capital initially invested.
- Partial cancelation. It is the recovery of a portion of the total capital initially invested. However, it should be noted that not all deposits allow this type of cancellation.
However, at the time of making the cancellations of the fixed-term deposits, bank commissions are generated, which have a greater impact on the cancellation of the fixed-term deposit, and that we can define as:
- The cancellation fee: It is executed on the interests that have not yet been generated.
- interest reduction. This is done when it is a partial cancellation, where the bank decreases the initial interest rate and therefore the cancellation conditions of the term deposit are modified. This happens at the time of renewal of the term deposit, so it is advisable to examine in detail all the conditions of your investment.
- Commission on the interest generated. This is established on the gross interest accrued up to the time of cancellation.
Advantages
The most important advantages of how to cancel a fixed-term investment fund are:
- Rental income: In a fixed term, profitability is an invariable percentage value set at the time of signing the contract.
- Greater profitability: the longer the maturity of the fixed-term deposit, the higher the profitability.
- Easy hiring: contracting a fixed deposit has no complications, it is very simple and can even be done through online banking.
- Guaranteed investment: fixed-term deposits are a safe investment since they are guaranteed by the Deposit Guarantee Fund.
- Security: Fixed-term deposits are the safest products and whose interest is obtained at the end of the period based on the money invested and the credit interest.
Disadvantages
Among the main disadvantages of how to cancel a fixed-term investment fund are:
- Commission: Banking entities can determine various direct or indirect commissions.
- Taxation: Bank deposits establish a tax in percentage terms, specified for these products.
- Anticipated cancelation: in cases of total or partial early cancellation, it may entail a penalty on the interest received.
- Low profitability: bank deposits offer very little profitability compared to other types of banking products.
- Immobilization: the money invested is immobilized for the duration of the investment contract.
Fixed term deposit
A Fixed-Term Deposit is a financial product, which consists of the delivery of an amount of money to a banking entity, during a certain time. After that time, the financial entity reimburses the money added to the interest that it has generated according to the established.
There is the possibility that the interest will be paid in a pre-established period during the duration of the operation and the same will be paid into a current account or passbook that the client will have to have opened in the financial institution.
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Classification of Time Deposits
In this section we will discuss how term deposits are classified.
Fixed Term Deposits
In this type of deposit, the institution forces you to pay on a predetermined day, deducting the amounts corresponding to readjustments and interest, according to the date established in the instrument.
Renewable Time Deposits
In this case, conditions similar to fixed-term deposits are established, with the exception that they can be automatically extended for a new period, under similar conditions. In the event that the depositor does not withdraw the money, the interest will continue to accrue on the new capital and the corresponding readjustments will be made for each period, that is, the interest will be recapitalized.
Indefinite Term Deposits
Indefinite-term deposits, no expiration date or term is established at the time they are constituted, the institution undertakes to repay them within a predetermined period from the notice of its client, in such a way that interest is paid and make the readjustments accrued from the date on which the deposit is made until the notified date for withdrawal is fulfilled.
Differences between a Time Deposit and Demand Deposits
- In term deposits, a "due date", that is, a term in which the money and interest can be withdrawn without paying a penalty or commission for it. The amount deposited will not be available until the expiration date.
- If one of the parties decides to cancel the contract before the expiration date, they will have to pay an early cancellation penalty. The penalties are not established in the brochures of rates and commissions, with some exceptions.
- In time deposits, direct debits and receipts are not allowed. Time deposits offer higher interest and are more profitable than sight deposits.
If you have a term deposit contract, you must be aware of it when its expiration date approaches, in order to make decisions about its renewal.
The profitability of fixed-term deposits has remained very low during the elapsed period of 2018 and maintains the same behavior as the 2017 interest rate.
A fixed-term deposit has this definition because it is an investment with a determined duration. Because the investor agrees to invest his money in exchange for an interest rate during a period established in advance.
Characteristics of Time Deposits
Fixed-term deposits have the following characteristics:
- These deposits are nominative and can be owned by both a natural person and a legal entity.
- The interest rate that is applied is previously agreed, and is based on the amount and time of permanence of the deposit.
- The depositor must respect the permanence time established at the opening of the deposit, failing which, it will be subject to the penalties agreed upon by both parties.