Fixed deposits have gained huge popularity in India in recent years. An FD is basically an investment alternative, where you put a lump-sum amount in a bank or an NBFC for a pre-decided period.
Most companies offer FD with a tenor between 12 to 60 months and a guarantee of return in any case. Moreover, during the investment period, your interest rates would stay the same even if the market rates fluctuate.
However, you will not get these benefits if you choose to withdraw the FD prematurely. It changes the FD interest rates, and there’s a certain penalty applied on an early withdrawal. Apart from these, there are also certain points that one should consider before thinking about withdrawing their fixed deposit before maturity.
What is a premature withdrawal?
Premature withdrawal means breaking an FD before the pre-determined maturity date. This might become necessary if there is an emergency. However, one should never miss out on the benefits by withdrawing it early.
Why no one should opt for a premature withdrawal
A fixed deposit is one of the safest options of investment; it offers a steady and attractive interest rate, and, upon maturity, you will receive your principal FD amount along with interest. So, opting for premature withdrawal might leave you with the few consequences –
- Decreased interest rates – Over the tenor period, your bank will offer you fixed FD interest rates on the principal amount. However, if you opt for a premature withdrawal, you will receive a reduced rate, causing you to lose out on the interest gains.
- Withdrawal penalty – The financial institution of your choice, whether it’s a bank or an NBFC, will charge a penalty for breaking a fixed deposit. Generally, this is calculated on the interest rates, decreasing it even more. Most financial institutions generally levy a penalty of 0.5-1% lower interest to customers looking to close their fixed deposits.
- Losing out on an investment – Your FD will multiply into a lump-sum amount by the time it matures. Think about it, once it matures, a part of the interest can be used to purchase assets, or go on a luxurious holiday. However, a premature withdrawal will result you losing the value you hoped for.
- Uncertainty – A fixed deposit is popular for its high returns, minus the risk; so if you have planned for your future and invested in FDs for high gains, breaking the deposit might lead to an uncertain financial condition. Tackling regular expenses will become tougher, as an assured source of finance will be lost.
What can be an alternative to breaking a fixed deposit?
There are multiple alternatives to breaking a fixed deposit. One of the most effective ways is to take a loan against the fixed deposit. Most of the time, the rate of interest is just 1-2% on the loan, making it cheaper than any personal loan, or credit card loan.
For an example, Bajaj Finserv offers loans against a fixed deposit at no extra charges. These can go up to 60% (for a non-cumulative fixed deposit) or 75% (for a cumulative FD) of the principal amount. Also, they charge no extra money and offer quick processing of your funds.
Maturity of a fixed deposit – a range of advantages
Emergencies require immediate access to funds, which is why a fixed deposit is withdrawn most of the time. However, a fixed deposit is an excellent investment opportunity to set aside some money for your future; so instead of breaking the FD, you should opt for a loan against it. Companies like Bajaj Finserv come with credit ratings of MAAA and FAAA (rating from ICRA and CRISIL respectively). They offer high FD interest rates and a market leading 75% on loans against fixed deposit.
It is an absolute requirement for everyone to save money and get proper returns with prudent investments. With steady and attractive returns, fixed deposits have become an all-time hit in Indian market. It is advised not to withdraw your FD especially when it’s nearing maturity. You can reinvest the money once it matures, calculate your returns with an FD calculator, and invest accordingly.