Friday, February 14, 2025
HomeBankingWhy is Breaking a Fixed Deposit NOT a Good Idea?

Why is Breaking a Fixed Deposit NOT a Good Idea?

-

When it comes to saving and investing in India, fixed deposits are by far the most popular option. They provide steady interest income and ensure the safety of the investment. However, many people regularly cash in their fixed deposits before they reach maturity. This may not be the best course of action and can even backfire. In this blog post, we will explore why cashing out your fixed deposit early isn’t a smart idea and suggest some better alternatives.

Define the term Fixed Deposit Account?

Banks provide fixed deposit accounts where customers can place a lump sum for a certain length of time and earn a predetermined interest rate. Without a doubt, this is one of the safest investment options available. Anyone living in India, regardless of age or nationality, can open a fixed deposit account.

When a fixed-income security (FD) matures, the investor is guaranteed a return on their investment. Interest may be collected semiannually or at the conclusion of the maturity period (sometimes called the lock-in period).

Why not break a fixed deposit?

Customers sometimes cash out their FDs early to cover unexpected expenses or to reinvest the money elsewhere in the pursuit of higher returns.

However, the penalty paid by banks if you withdraw from an FD before the term expires is typically 1% of the deposit amount, so you would lose your money if you do so.

Take into account, as demonstrated by the following illustration, that this penalty rate differs between banks.

Let’s pretend you invested Rs. 1,000,000 in a fixed-income instrument and left it there for five years. At maturity, you were initially promised 1,72,677 rupees. However, you may take out the money at a 5.5% interest rate after only four years. The new interest rate is 4.5 % (5.5 -1), which translates to Rs. 53,076 once the 1% penalty is applied.

Do you observe the loss registered?

Yes, when you break a fixed deposit (FD) before maturity, you often incur a loss in terms of reduced interest earnings and potential penalty charges. It is advisable to break an FD only in cases of emergency or if you are confident that alternative investment opportunities can provide better returns. However, this is generally not recommended due to the associated financial drawbacks.

What other options do you have?

You can find ways around draining your FD to take care of pressing costs or requirements. Get the details down below by reading on.

One strategy for investing in fixed deposits may be to divide the money into smaller chunks and place it all into different accounts. This is a far better choice than making a single set deposit. If you have many FDs, you may immediately withdraw money in the event of an emergency without having to rely on any one of them. The remainder is prudently invested among a variety of FDs.

If you need urgent cash, borrowing against your fixed deposit account is an excellent option to consider. A loan of up to 90% of your FD amount is permitted. Because the FD amount is put up as collateral, the interest rate on the loan is much lower than it would be for a regular loan.

You can substitute a credit card for the FD if you choose. With a fixed deposit of Rs. 12,000 or more, certain banks may issue you a credit card. You may be able to use a secured credit card backed by the FD to build or repair your credit.

Advertisement

Latest Posts

Related Articles