Are you looking to save or invest money? If yes, a fixed deposit is a great option. It is simple to start and provides competitive FD interest rates. To lay it out, the investor deposits a lump sum into their FD account for a certain period at a predetermined interest rate. After the term, the investor can withdraw the principal plus interest. So, Fixed Deposits are also known as term deposits.
When we are short on cash, one of the first things we do is break the FD. While this might seem like a good idea, it often is not. This article will help you decide whether it’s smart to cash out your Fixed Deposit before maturity. We have outlined the potential consequences and some alternatives as well.
Why it’s Not a Good Idea to Foreclose Your Fixed Deposit Account?
Many account holders prematurely break their FD for various reasons. It could be due to a liquidity crisis or reinvestment for a higher return. Although it is a common practice, it might not always be a good idea. Here’s what happens when you close your Fixed Deposit account prematurely.
- Reduced Interest Rate
Premature withdrawal results in a reduced FD interest rate and a penalty. For instance, let’s assume you have opened a 7% one-year fixed deposit. If you withdraw money after ten months, there will be a reduction of 1% on the income received on your fixed deposit. So, instead of getting 7%, you will receive 7% minus 1%, which amounts to 6%. So, your expected rate of return will be considerably lower than the possible return at the time of maturity.
There is a penalty for early withdrawal of FD that results in a lower FD interest rate. It is typically between 0.5 and 1% of the interest rate. Fixed Deposits that include a sweep-in feature and recurring interest payouts will incur penalties. As a result, your return on the Fixed Deposit will be quite poor. The penalty can change over time as financial institutions update their policies.
- Disrupted Guaranteed Growth In an uncertain financial market, a Fixed Deposit offers a guaranteed return. You know you will not lose that money, even if the return might not be as lucrative as stocks. When you prematurely close your FD account, you lose that guaranteed growth and the possible return. That’s why we keep saying that closing your Fixed Deposit account before the term is over is not a good idea at all.
Instructions for Making Premature Withdrawals from a Term Deposit
To foreclose on a portion of a fixed deposit, the investor might choose one of these options. Either choose a fixed deposit foreclosure or a partial withdrawal. Foreclosing on a fixed deposit incurs a small penalty. Nonetheless, the depositor’s account gets credited instantly. When making a partial withdrawal, investors can take out a smaller percentage of their fixed deposit’s total value. The withdrawn sum would be deposited into the investor’s savings bank account, and the remaining amount would accrue interest just as it would have if still invested.
To cash out the fixed deposit before its maturity date, you can do it in one of two ways: online or offline.
- Offline process: To cash out a fixed deposit before its maturity date, an investor needs to take these actions:
- Gather your supporting materials, like your Fixed Deposit certificates and proof of identity.
- The next step is to visit the bank’s home branch where you opened the FD account.
- Fill out the form for closing a fixed deposit account and return it to the bank officer.
- The bank’s representative will walk you through the steps necessary to foreclose on the fixed deposits.
- The money will get into your account when your fixed deposit is closed.
- Online process: Each financial institution has its own unique foreclosing fixed deposit method. You must have the internet banking service activated to close a fixed deposit online. Some banks don’t offer online account closing services for FD. In that case, you will have to visit your home branch.
Alternatives to Breaking Fixed Deposits in an Emergency
Other alternatives to breaking fixed deposits exist to meet urgent financial obligations. Here is a list of some of them:
- Instead of a fixed deposit, use a credit card. Many Indian banks, including SBI and SBM Bank (India) Ltd., need a minimum fixed deposit amount of Rs. 25,000 or Rs. 12,000 to make you eligible for their credit card rewards programs. Financial security is a condition for receiving one of these cards. Establishing a great credit history is another benefit of using these cards.
- You can get a loan on your fixed deposit account for quick cash. You can raise up to 90% of your available fixed deposit account balance. The interest rate on this loan is also often lower than that of a standard loan. A bank can use your predetermined amount as collateral instead of your credit score.
- You can invest smaller funds in multiple fixed deposits. This way, you can spread out your deposits and not depend on any one source.
It can be helpful to break the fixed deposit if you locate a reinvestment opportunity or have a liquidity issue. You need to do the calculation to determine whether the alternative investment’s returns are greater than your fixed deposit return after factoring in the penalty and the lower return. If you’re wondering when you should cash in your fixed deposit, it’s better to do so while it’s still new, like a few months after you created the fixed deposit account. You can get more details on FD on the site of Piramal Finance.