Why is Breaking a Fixed Deposit NOT a Good Idea?

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! 

What is a Fixed Deposit Account?

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. 

Why not break a fixed deposit?

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. 

What can you do instead?

To manage your immediate expenses or needs, you can find out some alternative methods without breaking your FD. Read below to know more. 

• A suitable method of investing in FDs could be to divide the principal sum into smaller parts and invest those in separate fixed deposits. This is much better than investing all of the money into one fixed deposit. Here, you are not depending on a single FD and can withdraw money from a small FD in case of any emergency. The rest of the amount remains secure in the other FDs.
• Short-term liquidity can be raised if you draw a loan against your fixed deposit account. You can take a maximum of 90% loan of your FD amount. In most cases, the interest rate is much lower for this loan than any other regular loan (You do not have to worry about the credit score as the FD amount is taken as collateral).
• You may opt for a credit card against the FD. Some banks have productive credit card options, which you can choose against a minimum fixed deposit of Rs. 12,000 and Rs. 25,000 respectively. The cards will be issued against the FD, which can also assist in the process of building up a good credit score.