Fixed deposits
(FD) are a safe investment option and provide fixed returns. However, it is
important to conduct proper research with regard to institutions offering FDs,
and the FD interest rates from each. Doing so saves you money and brings better
returns. Moreover, FD interest rates do not change once the deposit has been
made.
The Bajaj
Finance FD is a prime example of an FD. It
offers you one of the best FD interest rates that can help you grow your
savings, while also securing your principal amount. Senior citizens, however,
get the benefit of an additional 0.35% over and above the regular interest rate
with these FDs. You can use our FD calculator to calculate your returns.
Breaking the FD
Remember
though, that parking your money in an FD means that you will not be able to
withdraw that money, without losing the interest benefit. Moreover, if you wish
to take care of an urgent need for finances and wish to withdraw from your FD
investment, you will have to withdraw the entire amount, as opposed to partial
withdrawal. So, if you have deposited a sum of Rs.10 lakh, but you only want to
withdraw Rs.3 lakh to meet your emergency need, you won’t be able to. You will
have to withdraw the entire Rs. 10 lakh. This process is called breaking the
fixed deposit.
Consequences of breaking the FD
There is
usually a penalty applicable to those who break their FDs. This penalty is
usually levied by paying you about 0.5-1% lower interest (it varies from bank
to bank) on your money when you close your FD. However, if you are withdrawing
the money due to an emergency this fee may be waived off. The definition of
emergency here is vague though, and so this waiver of the fee is usually done
on a client-to-client basis.
The fee may
also be waived off if you reinvest the amount in another FD. However, if you’re
reinvesting when the FD interest rates have fallen, then you will have to
contend with lower returns.
When breaking your FD may be helpful
People often
break their FD when they can reinvest it in a new FD for a higher rate of interest. However,
it is very important to do the math properly before you try to do so. Always
remember that there will be a penalty of about 1% levied, when you reinvest the
money after breaking the FD.
For example, if
you have an FD of Rs.2 lakh for 4 years, with an 8% annual interest, you will
receive Rs.64,000 as the total interest at the end of 4 years. However, if you
were to break that FD after 2 years and reinvest it at a higher FD interest
rate of 9%, the interest accrued would come up to Rs.61,000. This is a
difference of Rs.3,000 from the interest if you had waited till the end of 4
years. Additionally, the bigger the principal amount, the bigger this
difference.
On the other
hand, if you were to break the FD to reinvest it when it’s relatively new,
within 6 months, you may actually gain money. Taking the earlier example of the
FD of Rs.2 lakh, if you were to break it and reinvest it within 6 months into
the deposit, the interest accrued would be Rs.68,500. This means at the end of
4 years you get an additional Rs.4,500.
Lastly,
remember that the best way to park FDs is splitting them. So, if you have a
lump sum of Rs.10 lakh, separate the amount between multiple FDs of Rs.1 lakh
each. This way, if you are in an emergency and need Rs.3 lakh, you can just
break 3 FDs of Rs.1 lakh each, saving you from losing interest on the rest of
your money. The other option would be to take a loan against your FD.
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