In India, fixed deposits are arguably the most preferred investment vehicle. It helps secure the fund, besides providing stable interest earnings. But many individuals tend to break their FDs, before maturity.
However, this may not be wise and in some cases, even counterproductive.
In this blog, we dive deep into why breaking your FD is not a good idea and what you can do instead!
Fixed deposits are provided by the banks through which a person can contribute a lump amount over a certain period and earn a fixed interest rate. This is unarguably one of the safest options to invest money in. A fixed deposit account can be opened by all residents of India, including senior citizens and even Non-Resident Indians (NRIs).
Individuals who invest in FDs are bound to obtain guaranteed returns when the FD matures. The maturity duration is termed the lock-in period, and the interest can be obtained on a periodic basis or at the end of the maturity period.
It is not uncommon for the account holders to break their FD prematurely to meet their liquidity requirements or to invest the same amount elsewhere in hope of better returns.
However, If you make an FD withdrawal before the tenure, you are bound to lose your money due to the penalty charged by banks – mostly 1% of the deposit amount.
Note that this penalty rate varies between banks which can be learnt with the help of the following example:
Suppose you have kept Rs. 1,00,000 in an FD for ten years. Originally you were supposed to obtain Rs. 1,72,677 after maturity. But, you withdraw the amount in the 4th year, with the interest rate being 5.5%. Now, you will have to pay a penalty of 1%, thereby losing out on the interest, which will now stand at 4.5% (5.5 -1), translating to Rs. 53,076.
Do you observe the loss registered?
If you are confident of replacing your FDs with other investment options, only then breaking an FD would make sense, or in case of emergencies. But otherwise, it is not a good idea to do so.
To manage your immediate expenses or needs, you can find out some alternative methods without breaking your FD. Read below to know more.