Understanding Interest-Bearing Accounts: How it Works, Benefits, and Risks

As women, we juggle a lot of responsibilities, from managing households to building our careers and planning for the future. One way we can make our hard-earned money work for us is by investing the same across different asset classes. However, traditionally, women used to save or invest their money only in interest-bearing accounts as it keeps money safe, offering a low-effort way to get interest on savings as they didn’t have much time. But, now as times are changing women have started shifting their investments to smarter investment options like mutual funds.

However, many women still invest only in interest-bearing accounts, but are you able to beat inflation, grow your money, or build wealth by investing in interest-bearing accounts? The answer is no. So, In this blog, we are going to understand what is interest-bearing accounts, the benefits of interest accounts, and the risks involved.

How Interest Accounts Work

An interest-bearing account is a bank account that pays interest periodically to customers to keep money in it.

For example, if you deposit ₹10,000 in an account that offers 3% interest per year, you will earn ₹300 by the end of the year, just to keep your money in the account. The bank pays you interest by allowing them to use your money for loans.

There are different types of interest-bearing accounts, including:

• Savings Accounts: A savings bank account is a type of account offered by banks where individuals can deposit money, earn interest, and withdraw funds when needed. It’s the primary bank account opened by customers to manage their money.
• Fixed Deposits (FDs): These accounts offer higher interest rates than savings accounts but lock your money in for a set period (e.g., 6 months, 1 year). It is the most popular investment option among Indians.
• Recurring Deposits (RDs): Here, as the name suggests you can contribute a fixed amount monthly for a specific tenure. It’s like a disciplined way to save regularly and earn interest.

Try out the Compound Interest Calculator

Benefits of Interest Accounts

1. Safe and Secure: Interest-bearing accounts offer a low-risk way to grow money while ensuring it stays safe.
2. Easy Access to Funds: Most savings accounts allow you to withdraw money when needed, making them ideal for short-term goals or emergencies.
3. No Hassle: With online banking, it has become easy to open and manage money.
4. Guaranteed Returns: Interest-bearing accounts give you a fixed return

Risks Involved

While interest-bearing accounts are generally safe, there are risks involved as well, let’s look at it:

1. Low Returns: The interest rates on these accounts are usually lower than what you might earn by investing in mutual funds. So, if you want to build wealth & grow your money, then you need to invest in smarter options like mutual funds
2. Inflation Risk: The inflation rate is higher than the interest you’re earning in interest-bearing accounts, and your money will lose value over time. For example, if inflation is 6%-8% and your account earns 3%,  your value of money is not growing.
3. Penalties for Early Withdrawal: For accounts like fixed deposits, withdrawing money before the tenure ends may lead to penalties or lower interest rates.

Ideally, one should diversify their investment portfolio against different investment options like equity, debt, gold, and fixed-income instruments which will enable one to get inflation-beating returns, maintain stability, hedge portfolio against inflation, and get fixed returns respectively. If you just invest in interest-bearing accounts then it will eventually degrade your money value due to inflation and you won’t be able to create wealth.

You can check out LXME’s goal and time-based mutual fund portfolios which are diversified, well-researched, and curated by experts.

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