Fixed deposits (FDs) are a popular investment option. Banks, non-banking financial companies (NBFCs) and post offices offer fixed deposits with varying terms and conditions. Understanding the key features of an FD can help you make an informed decision while investing.
Maturity periods
The maturity period refers to the tenure of the FD. It is the period for which you agree to lock in your money when opening the FD. The common maturity period options are as mentioned below.
- 7 days to 14 days
- 15 days to 29 days
- 30 days to 45 days
- 46 days to 90 days
- 91 days to 180 days
- 181 days to 270 days
- 271 days to less than 1 year
- 1 year to 2 years
- 2 years to 3 years
- 3 years to 5 years
- 5 years to 10 years
Banks allow premature withdrawals but charge a penalty for breaking the FD before maturity. The longer the maturity period, the higher the interest rate offered on the deposit.
Renewal of FDs
Banks offer auto-renewal facilities for FDs. This means that your FD will be renewed automatically for the same tenure once it matures. For instance, if you booked a 3-year FD, the bank will renew it for another 3 years after maturity, unless you instruct them not to do so. The interest rate applied will be the prevailing rate on the date of renewal.
To avail FD auto renewal, you need to tick the relevant option on the FD application form. Alternatively, you can submit a request later during the tenure. You can submit auto-renewal requests through your bank account online. If auto renewal is not opted for, the FD amount will be credited to your linked savings account on maturity.
Premature withdrawal
While FDs are meant for a fixed tenure, most banks allow you to close them prematurely. However, this usually attracts a penalty in the form of reduced interest. Each bank has its own premature withdrawal rules in terms of lock-in period and penalty percentage. Here are some common guidelines to be followed.
- Minimum lock-in period: Some banks enforce a minimum lock-in of 7 days for FDs while others allow withdrawal after just 1 day.
- Interest penalty: This is usually around 0.5% to 1% for premature withdrawals before 6 months. For FDs with longer tenures, the penalty can go as high as 1% of interest for each year of the deposit tenure.
- Partial vs full closure: Banks levy higher penalties in case of full closure compared to partial closure of the FD.
Factors to consider when opening an FD
Here are some key parameters mentioned below to evaluate before investing in a fixed deposit.
- Interest rates
The first thing to check is the interest rate offered. Interest rates keep changing based on Reserve Bank of India’s (RBI) monetary policies. Compare the rates offered by different banks/NBFCs to find the best rate. Also, longer tenures usually get higher interest rates.
- Minimum deposit amount
Each bank stipulates a minimum deposit amount for opening an FD. This can range from ₹1,000 to ₹10,000. Make sure you have the requisite amount before applying for an FD.
- Mode of interest payout
Banks offer two interest payout options – cumulative and non-cumulative FDs. In cumulative FDs, the interest payout is reinvested. It is paid on maturity along with the principal amount.
In non-cumulative FDs, you receive interest payouts periodically as per the chosen frequency – monthly, quarterly, half-yearly, annually etc.
- Premature withdrawal rules
Review the premature withdrawal rules of the bank as mentioned earlier before locking in your funds. Opt for a bank that offers higher flexibility just in case you need to close the FD prematurely.
- Online investment facility
Many banks allow you to invest in FDs digitally through net banking or their website. This enables a quicker and more convenient investment process compared to visiting the branch.
Conclusion
Fixed deposits remain one of the most popular investment instruments. By understanding the maturity period, renewal process and withdrawal rules, you can make better investment decisions. Comparing interest rates, tenure options and premature withdrawal policy across banks is advisable before locking in funds. Online FDs can simplify the investment process. Assess your liquidity needs, investment horizon and tax implications before choosing the suitable FD product.