Bank FDs come with some limitations such as premature withdrawals are not usually allowed or come with a penalty. Re-investing extra funds is generally at a lesser interest rate (if the rates are in the declining trend).
Bank fixed deposits are one of the most preferable and popular deposit schemes in India. They currently are fetching interest rates ranging from 5.50 to 6.50 per cent for tenures between 1 and 10 years.
Other than the interest rates offered on fixed deposits, the popularity of this deposit scheme is also because of the safe and secure nature of the investment. For instance, when one invests in an FD, the principal amount is invested at a fixed interest rate and interest gain on the deposits accrues and grows over time.
FDs also offer a wide range of tenures, from as low as 7 days up to 10 years. However, bank FDs come with some limitations such as premature withdrawals are not usually allowed or come with a penalty. Re-investing extra funds is generally at a lesser interest rate (if the rates are in the declining trend).
Hence, there are a few factors that you must consider while comparing the FDs available in the market.
1. Credibility of the bank: FDs are secured under the depositor insurance program by DICGC, and an amount of Rs 5 lakh is insured under this. Also, instead of putting all the money in one FD, industry experts say investors could break the investment amount into different banks to reduce their dependence. Additionally, to get a better idea, one can also refer to the credit rating of a bank.
2. Interest: Based on the tenure, the interest rates are offered by banks. The interest rates also vary from bank to bank. It also depends on the age of the depositor. Note that bulk or lumpsum deposits attract a higher rate of interest. Interest rates offered to senior citizens are 0.5 per cent higher than the regular rates offered by most banks. For the entire tenure of the investment, the FD interest rate remains the same.
3. Cumulative vs. Non-Cumulative: With a cumulative FD, one can re-invest the interest earned on a regular interval, wherein the compounding benefits and the accumulated interest is received at maturity or the end of the tenure. On the other hand, the interest is credited in the account on a regular interval, either monthly or yearly, in the case of a non-cumulative FD.
Usually, the interest rate in a cumulative fixed deposit is compounded quarterly and reinvested with the principal, whereas the non-cumulative FDs are suitable for retired investors and pensioners who require interest income to meet their day-to-day expenses.
4. Loan: Fixed deposit offers a loan facility to investors, which is one of the major benefits of this deposit scheme. During any financial emergency, one can avail of loans against FDs, up to 90 per cent of his/her own deposit. The tenure of the loan can be up to the maximum tenure of the FD scheme, as the maximum tenure is restricted up to the maximum tenure of the FD.
Note that on these loans against Fds, banks usually charge interest at 0.5 per cent to 2 per cent above the applicable FD interest rate.
5. Premature withdrawal: Investors need to pay a penalty to liquidate their FD investment before the end of the tenure, which varies from bank to bank. The penalty is usually charged by lowering the applicable interest rate by 0.5 per cent to 1 per cent by banks. Even though some banks allow investors to break their FDs prematurely without penalty, there are additional criteria that need to be met. Hence, experts say while selecting a bank for a fixed deposit, one should look for banks that impose a low penalty on premature withdrawals.