What should you be aware of before renewing your fixed deposit

Introduction

Fixed deposits are a popular investment choice amongst many Indians. However, they are always subject to renewal and withdrawal and this applies to all term deposit, including those in banks and NBFCs. Why a fixed deposit? A fixed deposit can help you maximise your savings and create wealth for your future. But when you have an on-going fixed deposit and its maturity date is near, you may be considering whether to renew your FD or not. Before you renew your FDs, weigh your options and read along in order to know more about what you need to consider.

 

In case you open an FD account for Rs.3 lakh for 10 years at the rate of 10%. After the completion of 10 years, the term deposit will have to be renewed if you want to continue with it. Otherwise, it has to be withdrawn. If you forget to renew it, it will be auto renewed for the same tenure if you have given maturity instructions. Renewal happens at the present interest rate that is offered on the term deposit.

Renewal of fixed deposits

On its maturity, a fixed deposit can be directed toward renewal or withdrawal.

The renewal clause is available as an auto-renewal feature, wherein the bank or financial institution will automatically renew your deposit for the same period of time and at the same interest rate on maturity. This is a good option if you have invested funds without any sudden need for them.

On the other hand, during withdrawal, the auto-termination option shuts down the fixed deposit on maturity and transfers the funds to a preselected savings account. But this auto-termination option may result in lower interest rates on your reinvestment owing to market changes during the tenure of the original FD.

It is important to take an informed decision while renewing your fixed deposits in order to get the highest benefits. Withdrawal can be done even before the FD matures, however, this may come with some penalty charges.

If you forget to renew an FD

Most Indians have this ‘buy and forget’ mentality. This won’t work for a long time in case of FDs. Let’s say that X invested Rs.5 lacs in a 5 year FD with interest rate of 0%. At the end of 5 years, the fixed deposit rates have fallen to 8%, a significant decrease over the said period. In case X had opted for auto-renewal, he would have been automatically enrolled in the same FD for another 5 years and at the same rate of 10% regardless of market rates. If X had opted for withdrawal, a new fixed deposit will offer you 8% rate of interest on the deposit.

 

Take another case study. Suppose you have bought a fixed deposit f of Rs.5 lacs for a tenure of 5 years and forgot about the maturity date. At the 6th year when you do realise that you had invested in an FD, you go back to the bank and ask for withdrawal of funds. The bank obliges but what happens is you end up losing interest for the excess one year of deposit because it will be considered preclosure of the account. If you had opted for auto-withdrawal, you would have received the amount in a bank account and taken decisions to grow it or let it idly earn savings interest.

Term deposits require an investor to park a significant portion of funds within a financial institution for a predetermined amount of time. The investor receives an interest income associated with a specific tenure. The interest income can be credited to their account either during the date of maturity (along with the returns) or at monthly, quarterly, half-yearly or yearly intervals. Most financial institutions offer the fixed deposits in two variants–premature withdrawal facility and without premature withdrawal facility.

Premature withdrawal of a term deposit or a FD would mean liquidation of the deposit prior to the date of maturity. Premature withdrawal of funds from their FD is usually associated with a penalty. A majority of the financial institutions charge a penalty using the following formula:

Rate for premature withdrawal = Interest rate applicable while opening the account – 1%

If an investor has opted to receive interest income at periodic intervals, the penalty is calculated and deducted from the total returns at the end of the tenure. Therefore, premature liquidation of funds negatively affects the maturity value that one gains from the fixed deposit. The penalty linked to the withdrawal varies with every bank. It is important to check the penalty charge along with the interest rates before choosing an FD scheme from a particular bank.

Conclusion

Investing in secure tools like fixed deposits should be on every adult’s financial planning agenda. Innovative products like Bajaj Finance Fixed Deposit available on Finserv MARKETS offers you a hassle-free process online with minimal documentation and lucrative interest rates. Fixed deposits with non-banking institutions like Bajaj Finance Fixed Deposit available on Finserv MARKETS can fetch you a higher rate of interest every year, making it more appealing than a regular fixed deposit in a bank.

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