In India, fixed deposits (FDs) with banks continue to be the investment of choice for the ultra-conservative investor. The attractiveness of FDs stems from their safe and secure character as an investment.
If you go and try to talk to your grandparents or parents, most of them will still prefer putting their money in a fixed deposit over investing in stock market.
A fixed deposit is an investment tool that banks and non-banking financial institutions provide to their clients in order to aid in their ability to save money. You can put a sizable sum of money in an FD account for a certain length of time at a predefined rate of interest.
However, there might be few instances where you are in a need of emergency funds and wish to withdraw your money. You must pay a penalty if you wish to withdraw your FD before the end of its term or before it matures. In addition, if interest rates on FDs are on the decline, reinvesting money at a later time may provide a lower rate of return.
We discuss some methods to avoid penalty on premature withdrawal of FDs.
Sweep-in accounts, commonly referred to as 2-in-1 accounts or money multiplier accounts, offer both the interest rate of an FD and the liquidity of a savings account. The interest rates of a sweep-in fixed deposit account are comparable to those of a standard FD, and investors also benefit from the liquidity advantages of a savings account.
You must open an FD account with a minimum deposit of Rs. 25,000 in order for your savings bank account to be eligible for this deposit. The sweep-in option, which has the advantage of offering a higher rate of return, enables you to set up a separate corpus that you may withdraw in times of emergency without affecting any regular investments.
Withdrawals are not subject to any fines or penalties. Additionally, if you remove funds from your accounts in case of an emergency, the interest rate on the remaining balance will stay the same.
The process of "laddering" your bank FD entails getting many fixed deposits with different maturity dates. It is one of the most effective methods of managing liquidity. All you have to do is divide your lump sum investment into multiple small amounts to achieve this.
Instead of locking in a 5-year deposit, depositors can spread their investment among 1, 3, and 5-year FDs. You may also keep reinvesting your money, which will enable you to have a sufficient amount of cash that will be maturing throughout a variety of maturity dates to meet your needs. You may choose a ladder based on your needs and convenience.
Loan against fixed deposits
Taking out a loan against FD is the alternative way to avoid paying a penalty for early withdrawal of FD. Almost all banks permit investors to avail a loan against their fixed deposits. The interest that is levied on a loan of a fixed deposit often exceeds the interest paid on the fixed deposit by one to two percent. However, because the interest rate is determined by the bank, it might vary from one bank to another.
You can utilise any of these methods to protect your funds before making a fixed deposit because crises can happen to anyone at any moment. These methods are advantageous to us and effectively protect your hard-earned money from penalties if you must withdraw it before maturity due to an emergency.