Floating Rate FDs Or Fixed Rate FDs — Which should you choose?

Congratulations on landing your first job! This shift from campus to corporate has been a significant change in your life. As you are adulting and taking your first few steps in this big wide world, it is time to take up newer responsibilities. You must now take up the mantle and forge ahead with new plans, hopes and dreams, while carrying the weight of garnering the required resources. We all know that the earlier we start saving, the faster will our savings grow. To do this, you might be looking forward to entering the world of investments and savings options. 

As a beginner, it can be challenging to ascertain the right plan to put your money in. Choosing just one plan in a host of thousands might be daunting. A safer way is to take baby steps and start with one of the most secure ways of saving. Traditional options like fixed deposits are a simple and stable way to save your money. The recent hike in repo rates and rising FD rates makes this a great time for beginners to start saving with this financial instrument. 

What is an FD? 

The most crucial aspect of investing is understanding. Unless you correctly understand how your saving plan works, it isn’t easy to gauge the effects and benefits of saving on your future finances. You must learn about the workings and calculations for every investment and saving you make. So, let’s get started with understanding what exactly an FD is. 

Under a fixed deposit, you deposit a fixed amount for a fixed tenor. During this time period, an interest rate, as per specifications, is applied and you receive a return based on these. These rates can be of two types, i.e., a floating rate and a fixed rate. 

Fixed Rate FDs: 

For all those who do not cope well with constant changes and fluctuations, a fixed rate FD is a great saving tool. Under this, your money is deposited as per a single fixed rate of interest. Let us understand this with an example.  

Let’s assume that you invested ₹5 Lakhs for a tenor of 5 years under a fixed rate FD scheme. If the interest rate offered is 5% then you will receive an estimate return of ₹1,41,019. Hence, on a deposit of ₹5 Lakhs you will receive a guaranteed total of ₹6,41,019 in a span of 5 years, unless you break open you FD prematurely.  

Floating Rate FDs:

If you are looking to make the most of rate fluctuations, try going for a Floating Rate Term Deposit. Under this, your interest rate keeps changing regularly based on the bank’s treasury bill rates. Treasury bills are auctioned every two weeks on the Reserve Bank of India’s website. These acts as a benchmark to determine the rates for a floating FD. Furthermore, the rate also depends on the mark-up value. Mark-up value is the difference between the purchase price paid by the broker and the cost at which it is sold to the customer in comparison with the security’s current price. This value is reset once every year.  

This FD is for someone who is more financially savvy and has experience with the directionality of future inflation and changing interest rates. It allows you the benefit from fluctuating rates without having to re-book or close your deposits. 

Let’s understand this better with an example. You are offered a floating FD with a mark-up of 0.8% more than the repo rate. Now let us assume that the repo rate is 4.5%. In this case, you are eligible to get returns of 5.3% annually on your deposit. Now let’s say the repo rate falls to touch 4% a year later. In this case your revised floating FD rate will now be 4.8% per year. Saving with a floating rate FD is advisable when a potential hike in repo rates has been predicted for the near future. However, it might even lead to lower rewards if the trend starts declines. 

The FD’s interest is paid out every 3 months under the floating rate. With this, you can get regular returns. Moreover, some financial institutions also provide you with an overdraft facility of up to 90% of the deposit amount. You can make use of this facility within a day of informing the bank. You can also choose to make premature withdrawals from your floating rate FDs without paying any penalty, but this is subject to the rules laid out by banks. 

How Should You Choose? 

Depending on your requirement, you can either opt for a fixed rate FD or a floating rate FD. Preferable, those new to investments are recommended to go for stable and secure fixed rate FDs. Meanwhile, those who are more well versed with the workings of rate fluctuations and inflation can opt to save their money with a floating rate FD. 

Whatever your choice, you can head on over to Bajaj Markets! Find the best of rates offered to you by multiple FD providers. With an easy digitised process and a user-friendly portal, save your first salary and grow your finances one step at a time through FDs! 

Glossary: 

1. Treasury Bill – These are short-term financial instruments (usually lower than a year) issued by the Reserve Bank of India and borrowed by Individuals, Institutions, Firms, Trusts, and banks. 
2. TDS – Tax Deducted at Source was introduced as a way to deduct tax at the very source of your income and is then remitted to the central bank’s account.