A bank fixed deposit is one of the safest ways to park your surplus fund. When you don’t want the market fluctuations to have an impact on your investments, then a fixed deposit can be the best investment vehicle for you. An investment in a fixed deposit can be done in two different ways, first is a recurring deposit account (RD) where you pay monthly instalments and the second one is making a one-time investment where you keep a lump sum amount at once. Along with the security of your investment,
The Benefits of a Fixed Deposit Includes
- Fixed and steady income from interest component
- The steady growth of savings as they mature over the tenor.
- It can be a regular source of income for senior citizens after retirement.
- Interest rate higher by 0.50% for senior citizens
- An investor can have a choice to withdraw the interest component or lump sum at maturity
- A varied range of tenure from 7 days to 10 years.
When you invest in a fixed deposit for any tenure, you are not allowed to withdraw your money. If you have to withdraw your investments, it is called a premature closure of fixed deposit. Premature closure of a fixed deposit makes the investor lose the actual benefits of investing the money.
Here are the Consequences of a Fixed Deposit Withdrawal Before Maturity
If you make a premature withdrawal, you will have to pay a penalty to the financial institution. The penalty of your investment will lessen the profit which you were about to receive by investing. The penalty of a premature FD withdrawal is 0.50% to 1% of the interest.
- Interest Loss
When you withdraw a fixed deposit before it gets matured, you will not get the exact amount of interest you should have got at maturity. A fixed deposit of 8% interest per anum will give you a return of 7 to 6.50% if withdrawn prematurely. This would cause a financial loss for you.
- Give a Halt to Your Financial Growth
Fixed deposits give you attractive benefits when the tenure is longer. If you have opted for a cumulative fixed deposit, your earning will be much more while withdrawing the money in maturity. However, if you withdraw your money in the mid of the tenure, your financial growth will be hindered. You may get only the amount which you have invested. Moreover, the financial goal of yours for which you were investing cannot be fulfilled.
- Cumbersome Procedure
Along with everything else, never to ignore the fact that a premature withdrawal of a fixed deposit comes with a cumbersome process. There are a lot of formalities that one has to go through to make this done. The formalities include filing forms, submitting documents, meeting the bank officials etc. Only after going through all these processes one can get the money invested in a fixed deposit.
How to Avoid Premature Closure of Fixed Deposit
- Adopting a Laddering Approach in Investing
This is a kind of investing method in which the investment is done in different FDs instead of a single one. Some investments are done for longer tenure such as 7 or 10 years while some others are for 1 year or less. This way of investment gives better liquidity of funds invested. When the shortest duration fixed deposit will mature, one can reinvest for a longer duration. In this way, the money will be revolving and chances of covering any kind of financial urgencies will be increased.
- Sweep-in Deposit Account
A sweep-in deposit account can be one of the best alternatives for avoiding the losses of premature withdrawal. A sweep-in account gives you liquidity like a savings account with interest like a fixed deposit.
In such accounts, the account holder gets an option to decide the minimum amount to be kept in his/her savings account. Any amount which is more than the decided amount will be transferred to the fixed deposit account. If you want a liquid fund which is more than the threshold amount, the amount from the fixed deposited will be transferred to the savings account. Let’s say, you have Rs.50,000 in your bank account and threshold limit is Rs.15,000, then the Rs.35,000 will automatically be moved out and converted into an FD. If your savings account deficits, the fund from the FD will be transferred to the savings account.
- Take Loan
One can take a personal loan by keeping the fixed deposit account as collateral instead of closing the fixed deposit. A fixed deposit can always be used as collateral of a secured personal loan. But point to remember that, the loan amount will be 60-70% of the fixed deposit amount. But this will make you not to close your fixed deposit. Moreover, the interest rate on a secured personal loan is not high.
To Sum Up
If you have invested in any kind of investment vehicle, the maturity will only give you the best benefits. Being an informed investor, one must not invest more than 60% in fixed deposits so that better liquidity of fund can be enjoyed.