Premature withdrawals on FDs are not allowed without a penalty being added. To avoid such a situation, there are other approaches one can adopt while investing in FDs.
Bank fixed deposits (FDs) usually come with a wide range of tenures, starting from 7 days to as long as 10 years, wherein the principal amount is invested at a fixed interest rate, and the depositor gains interest on their deposits, which accrues and grows over time.
However, premature withdrawals on FDs are not allowed without a penalty being added. Also, note that re-investing funds by the depositor, when available again, could be at a lesser interest rate if the rates are in the declining trend. In case of liquidity, the interest applicable to the depositor will be only for the period held.
To avoid such a situation, there are other approaches one can adopt while investing in FDs.
Here is how you can avoid such situations and get your funds liquidated;
Instead of breaking the fixed deposit, depositors can avail a loan against FD. Most banks allow their depositors to take a loan against their fixed deposits. The interest rate for the loan on FD is usually 1-2 per cent above the interest paid on the deposit which, however, varies from bank to bank. Experts say taking a loan against fixed deposits can be benefitting for the depositor instead of opting for a personal loan. It is so because the interest rates on loan against FDs are generally lower than that of personal loans as they are secured by the underlying deposit.
Investors who are concern with liquidity can also opt for a sweep-in FD account. Sweep-in accounts, also known as 2-in-1 account or a money multiplier account provides not only the benefit of liquidity of a savings account but also the interest rate of an FD. Hence, the interest rates are similar to a regular FD of a sweep-in fixed deposit account, along with which investors also enjoy the liquidity benefits of a savings account. The penalty is also not charged on utilizing funds or on premature withdrawals with a sweep-in account. With a 2-in-1 account, any amount above the threshold limit in the saving account is automatically transferred into the depositor’s FD account. Also, if there are insufficient funds in the savings account, withdrawals from the fixed deposit account will be made and funds will be moved back into the savings account, to fill the deficit. Hence, one is needed to maintain enough balance in the savings account so that one’s fixed deposits don’t get disrupted.
Another option is the laddering approach – wherein the depositor can manage the interest rate risk in a better way and also provide liquidity to funds. With this option a depositor can spread their investment across different tenures – for instance, one will be investing in one or more financial products with different maturity dates. Depositors can spread their investment across 1, 3, and 5-year FDs instead of locking in a 1-year deposit. One can also renew their FDs for the longest duration and continue the process when FDs get matured.
State Bank of India (SBI) charges interest on a daily reducing balance for fixed deposit loans without any processing fee and pre-payment penalties. They offer loans at 1 per cent above the relatively fixed deposit rate. While opting for a loan against FD some banks also give the option to opt for up to 90 per cent of the value of the fixed deposits with the bank.