For businesses with surplus cash, term deposits might seem like a logical choice. They are simple, secure, and offer fixed returns. However, they also have critical limitations that can make them less than ideal for modern cash management.
What are term deposits ?
Term deposits, also known as fixed deposits, require you to lock in a sum of money for a set period, ranging from a few months to several years, in exchange for a fixed interest rate. While they provide a guaranteed return, this comes at the cost of flexibility.
The downsides of term deposits
1. Lack of flexibility: Funds in term deposits are locked in for the duration of the term. Early withdrawals often incur penalties, limiting access to cash when it’s needed most. This can be particularly problematic for businesses facing unexpected expenses or opportunities.
2. Lower returns: Interest rates on term deposits are often modest and may not keep up with inflation, especially in low-rate environments. This can result in a loss of purchasing power over time.
3. Administrative burden: Setting up and managing term deposits can be time-consuming, particularly for businesses dealing with multiple accounts.Tracking maturity dates and reinvesting funds adds complexity to cash management.
4. Opportunity cost: By locking in funds, term deposits prevent investors from taking advantage of potentially higher-yielding opportunities that may arise during the term.
Better alternatives
Treasury Bills (T-Bills) offer a compelling alternative. They provide similar security but with greater flexibility and liquidity. With T-Bills, you can access your funds more easily while earning competitive returns. Additionally, T-Bills’ short maturities and liquid secondary market make them ideal for dynamic cash management.
In a fast-paced financial world, term deposits may no longer be the best solution for surplus cash. It’s time to explore options like T-Bills that align with modern financial needs, offering the perfect balance of security, flexibility, and returns.
If you'd like to find out more about the Treasury-bill funds we offer at Velesios, we're pleased to present them here.
