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What is a floating rate fixed deposit?

By Finserv MARKETS - Oct 15,2019
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What is a floating rate fixed deposit?

Mr Biswas was in his 60s and he relied on fixed deposits to grow his wealth as well as to meet his regular expenses. One morning at regular yoga class in the community park, someone talked about how he had benefited from a FD with a floating interest rate. Now this was something unheard for Mr Biswas. Are there such fixed deposits as well? Does his bank offer a floating rate FD? These and many other questions arose in his mind on his way back home.

Floating rate fixed deposit offers an interest rate that varies according to the change in the bank’s base or benchmark rate. This is unlike a fixed-rate FD in which the interest rate remains unchanged during the tenure of the deposit. Base rate is the threshold interest rate below which a bank cannot make any commercial, retail or personal loans. Each bank has the freedom to fix its own base rate.

In its monetary and credit policy of 2002-03, the Reserve Bank of India (RBI) had advised all banks to offer flexible rate FD alongside the fixed-rate option. However, despite the go-ahead from RBI, most banks have so far been offering fixed deposits with a specified rate of interest which varies from one bank to another.

Depending on the tenure of the floating rate fixed deposit, the interest rate changes to narrow the gap between itself and the prevailing base rate of the bank. The greater the tenure, the lesser the gap between the interest rate offered by the bank and the base rate. Infact, they may even be at par.

For instance, a one-year floating rate FD may earn an interest rate 50 basis points below the base rate, while a three-year deposit may fetch a return 25 basis points below the base rate. A five-year flexible rate FD might have an interest rate equal to the base rate.

What this means for you as a customer is that, a flexible rate FD offers markedly better returns on investment as compared to a plain vanilla fixed deposit especially over a three and five year period. This is because the interest rate changes each time the base rate does, moving a few basis points above the fixed term deposit rate. However there is a caveat here.

Keeping your money in a floating rate fixed deposit is a good option when the interest rates are expected to rise, the economy is booming or even during phases of high inflation. You may lose out on your money in a scenario where the interest rates are falling or about to fall. However, it is not easy to predict interest rate cycles and gauge whether or not the market will be steady, fall further or even rise.

Especially for first time investors or those looking for the safety of guaranteed returns, a floating rate FD might be a riskier proposition. Given that these deposits are sensitive to interest rates, they may not be able to provide a steady income over time. To protect yourself from the uncertainty associated with a flexible interest rate deposit, you can stagger your investments across fixed deposits. This ensures you have a steady supply of money when you need it, as the money lying idle in your savings account can be invested in a deposit to create wealth.

Finserv MARKETS offers you the facility of multiple deposits, starting as low as Rs 25,000. You don’t need to accumulate a huge corpus to begin saving. You can start small, and keep on saving for your future financial goals even with a limited amount of money. Opening a fixed deposit with Finserv MARKETS is easier thanks to technology.

All you need to do is log onto the website either through your smartphone or laptop right in the comfort of your home or office and complete the process in a few easy steps online. Choose the amount you wish to invest and the period of investment in months. Specify the interest payout option and submit a few necessary documents such as your passport photograph, PAN and an identification proof such as Aadhar, passport, Voter Id etc. Upon verification of these documents, proceed with payment online and start on the journey of creating wealth.Finserv MARKETS , from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522