Deposits Are: Definition, Types, Advantages and Risks, As well as Tips for Choosing Deposits

Do you want to try investing in deposits? Before doing so, make sure you know the types of deposits and their various benefits.

Well, this bank's term deposit product offers better interest or returns than conventional savings and is therefore a great choice for fund development. However, you should know that there are various types of deposits with different functions and purposes.

So that you don't get confused, we have summarized the discussion regarding the meaning and types of deposits as well as tips on choosing one. Check out the article below until it's finished!

Definition of Deposit

Deposits are investment vehicles issued by banks that have a higher rate of return than ordinary savings. According to the OJK, deposits are deposits that can be withdrawn at a certain time according to banking regulations. The customer deposits a sum of money in rupiah or foreign currency to the bank for a certain period of time. The customer can then withdraw these funds at the end of the period.

In general, deposits are known to accumulate savings over a certain period of time. With relatively fixed interest rates, customers can guarantee that the value of their investment will not decrease. Therefore, this investment vehicle is relatively safe and reliable.

Interest rates are also higher compared to regular savings accounts, but customers can only withdraw money at the time specified in the initial contract. At certain times, banks pay interest to customers via bank transfers.

Interest payments can be made every month or every maturity date with a certain amount according to the provisions of each bank. If the customer withdraws the deposit balance prematurely, he must bear fines and various other risks. 

Deposit Term

Regarding deposits, there are various deposit term options that you can choose according to your needs and preferences. The terms generally offered are 1, 3, 6, 12 months or up to 24 months. Money deposited will be held for the selected period and can only be withdrawn after the period ends. After the due date or due date has passed, all deposited amounts and any interest received will be refunded according to the bank's policy for the selected deposit. 

What if you want to roll back deposits for a longer period of time? Currently, many banks that offer deposit products have an automatic rollover called Automatic Roll Over (ARO) that you can choose from. With this automatic system, when your deposit is due, the money you deposited will be carried over to the next period. This will continue automatically until you decide to withdraw your deposit. Thus, the money you deposit accumulates automatically. This convenience makes deposits a popular choice among novice investors. 

Types of Deposits

1. Time deposit

Time deposits are a type of deposit that allows customers to receive interest for a certain period of time based on an agreement with the bank. Accrual periods generally start at 1, 2, 3, 4, 5, 12, 18 and 24 months. If you want a short term investment, you can choose 1 month, 3 months and 6 months products.

2. On-Call Deposit

On-call deposits are a type of time deposit with a relatively short holding period. The minimum investment period is 1 day and the maximum period is 1 month. However, customers have to make a large deposit.

3. Certificate Deposits 

Certificates of Deposit are a form of deposit that can be issued and transacted with other parties within a period of 1, 3, 6 and 12 months. This type of product is a certificate that does not refer to the name of a particular person or institution. Payment of interest on this investment vehicle can be made in advance, monthly or at maturity. 

Advantages of Deposits

There are various types of fixed deposits that you can use to deposit money in the bank for various purposes. Banks offer customers a number of advantages when they choose to invest in deposits, including:

1. Security Guarantee

The bank fully guarantees the safety of deposits. This is clearly more profitable than staying at home because it has many bad opportunities and you are easily tempted to take advantage of them.

Saving deposits is more profitable. Apart from strict bank security, they are also fully responsible if something bad happens to your money.

2. High Interest Rates

When saving with fixed deposits, customers receive interest according to the term of the deposit. So the longer YOU keep your money in the bank, the bigger the profit.

In addition, if YOU open a long-term deposit with a large initial capital, the profit will be higher. Depending on the initial agreement between the customer and the bank, the monthly or annual interest income will also be higher. 

3. Low Risk

If the funds used for investment are company shares, you don't need to be afraid of experiencing losses. There is very little risk of loss with bank deposits, there may be no risk of loss.

4. Tradeable

The advantage of investing with deposits is that they can be freely traded and generate profits. Fund owners can not only earn interest, but also sell investment certificates and thus make more profit.

5. Guaranteed Deposit Insurance Agency

Customer funds deposited with bank deposits are guaranteed by the Deposit Insurance Agency (LPS). So you don't need to worry about losses because LPS will pay for the funds deposited in the event of a bank bankruptcy.

Funds offered by LPS can reach up to 2 billion rubles per client. Therefore, before you decide to invest money in a deposit, you must ensure that the bank is under the protection of a deposit insurance company. 

Deposit Risk

1. Penalty Loss Risk

The existence of penalties or fines is a means by which customers cannot withdraw funds before the specified time limit. In the event of early cancellation by the customer, a contractual penalty will be imposed on the customer. The customer must pay certain management fees as management fees according to certain bank regulations. Generally, the penalty amount is between 0,5 and 3 percent. However, each bank has different conditions.

2. The Risk of Not Paying Interest on Deposits

Deposits are one of the instruments that have the risk of interest rate fluctuations. If the customer pays off his deposit before a certain time, it is also possible that the customer will lose interest income. Some banks have provisions for withdrawing interest or not paying customers who withdraw money before maturity. 

3. Reducing Interest Income Risk

If the customer makes a payment before the due date, the customer will receive less interest than the original contract. In addition, deposit interest is also taxable, so customer interest income is tax deductible. The IRS stipulates a deposit tax regulation based on PP 131 of 2000. Based on this regulation, customers with savings of more than IDR 7,5 million must pay a 20% tax on interest. 

Deposit Tips

Before you decide to deposit your money, there are a number of things you should consider when choosing a bank. One of the most important aspects of selecting a deposit is ensuring that the bank's reputation and operations are good and reliable. Make sure the bank meets the eligibility requirements set by Bank Indonesia and has solid finances so that the savings you keep are safer and less risky. Also make sure that the interest rate offered by the bank is still within the limit guaranteed by LPS, which is a maximum of 7,5%. Be wary of banks that offer higher interest rates than LPS provisions. 

Make sure your friends have considered and adapted it to your needs and financial capabilities. Don't forget to consider the risks and security of each investment tool. Hope it is useful!