Premature withdrawal of Fixed Deposits is not allowed without a penalty being imposed. For avoiding such a situation, there are three smart approaches you can adopt when investing in a Fixed Deposit scheme.
Bank FDs provide a wide range of tenures that range from seven days to 10 years. The principal amount of FD is invested at a fixed rate of interest, and hence you gain interest on your deposits that grows with time. However, premature withdrawal on Fixed Deposits is not allowed.
That means, if you want to withdraw your FD before completion of its tenure or before its maturity, you have to pay a penalty. In addition to this, re-investment of funds, when available again, can be at a lesser rate of interest if the interest rates on FDs are in a declining trend. In the situation of liquidity, the rate of interest provided to you on FD will only be at the period held.
For avoiding such a situation, we are here discussing three smart approaches that you can adopt at the time of investing in a Fixed Deposit:
Experts suggest opting for the below mentioned three methods for avoiding penalty on Fixed Deposit’s premature withdrawal:
Laddering of your Bank FD is a method that involves purchasing multiple Fixed Deposits with different maturity periods. It is one of the best ways to manage liquidity. For this, all you need to do is to divide your lumpsum investment amount into small-small investments. For instance, if you want to invest Rs.5 lakhs in a Fixed Deposit, you can break this amount into five smaller Fixed Deposits and invest this amount across different maturity periods.
This way, you will be able to have five different Fixed Deposits maturing after 1 year, 2 years, 3 years, 4 years, and 5 years. In this way, you will be able to have sufficient liquidity and if you require money in this period, you will be able to go for pre-mature withdrawal of your money as per your requirement.
For instance, if you need Rs.2 Lakhs for some medical emergency and you have only one FD of Rs.5 Lakhs, then you have to break it and have to pay the penalty for the same. However, if you have invested your money in five different FDs of Rs.1 lakh each, you can select to break two FDs and the rest of the money will fetch the same rate of interest at which you have booked the FD. You can as well keep reinvesting your money and in this way, you will be able to have ample cash that will be maturing in different maturity periods for serving your purpose. You can select a ladder according to your requirement and convenience.
It is not needed to divide the entire amount into equal amounts. You can as well compare the rates of interest of FDs offered by different banks at different tenures for laddering and get the benefit of insurance of Rs.5 lakhs on your FDs.
The second method to avoid penalty on FD’s premature withdrawal is taking a loan against FD. Almost all the banks allow their investors to take a long against their Fixed Deposits. The interest that is charged on a loan of a fixed deposit is mostly one to two percent more than the interest that is paid on the fixed deposit. The rate of interest, however, depends on the bank and hence may vary from bank to bank.
The interest rate that State Bank of India charges on a loan against FD on a daily reducing balance without any pre-payment penalty and processing fee. The bank provides loans at the rate of one percent more than the rate of fixed deposit. Banks like SBI provide loans for up to 90% of the value of the FD.
The facility of sweep-in can be provided by the bank wherein you have your savings account. Under this facility, you can allow your bank to transfer any amount that is more than the amount that is specified by you from the savings bank account to your sweep-in deposit. The name of this method may vary with banks. For example, the savings plus account of the State Bank of India serves this purpose only.
Whereas ICIC Bank serves this facility with the name of Flexi deposit and HDFC Bank calls it a sweep-in fixed deposit. The tenure of this FD may vary from 1 year to 5 years and the rate of interest will vary accordingly. However, one thing that is common with all the banks' sweep-in deposits is that the amount that you transfer earns you a higher interest rate.
To make your savings bank account eligible for this deposit, you must open an FD account with at least Rs. 25,000. With the feature of providing a better rate of interest, the sweep-in feature enables you to create a separate corpus that you can withdraw at the time of some emergencies without touching any regular investment.
There are no fees charged or penalties levied on withdrawals. Moreover, if you withdraw money from the deposits in case of some emergency, the remaining amount will continue to get interested at the same interest rate.
Before investing in a fixed deposit, you can use any of these approaches to safeguard your money because emergencies can come to anyone and at any time. In a sweep-in facility wherein you can link your savings account with an FD account, in loan against FD you can take loan up to 90% of your FD amount, and in laddering, you can divide your FD amount to small-small fixed deposits.
These approaches are helpful for us and work well in saving your hard-earned money from penalties if you need to withdraw before maturity in case of emergency.