Renew Bank fixed deposits

New year is a time for reflection and these are the thoughts that came to my mind:
Q1: Should you check the “auto-renew” option in your FD?

NO, Never! Seems to be that this is a huge scam. The banks seems to offer interest rates based on the duration of the FD and the slab for the highest interest rate changes every month/quarter. Hence an auto-renew option will only lock you in an unfavorable interest rate slab. Refer to the Citibank interest table to understand what I am trying to say.

Q2: Is FD best investment options?

It provides good flexibility (you could open an FD any day for any amount and withdraw it at an hour’s notice) but this comes at a cost. i.e. interest rate/returns are substantially lower. So generally speaking it is better to keep money in FD rather than savings bank account, but not for multiple years.

Also one should be aware that there is TDS (tax deduction at source) and interest income is fully taxable. Hence one should look for more tax-friendly options. Generally I use FD for 2 purposes:

1. Planned expenses: purchase of house/car, insurance premium, vacation, tuition fees etc. FD allows you to accumulate funds whose maturity matches with your cash-flow projections ensuring that one is not cash-strapped at any time.

2. Unplanned savings: Procrastination & asset sterilization: Excess money in one’s bank account always gets spend. Many people avoid credit cards as it prompts them to spend more. Fixed deposit is a good place to park the savings (esp. excess monthly surplus) till one finds a more lucrative use for them.

So essentially use FD as a planning tool rather than an investment tool.

Q3: Should you break an FD or take a loan against it?

As a rule of thumb any FD opened less than 6 month ago should be broken rather than restructured (loan/borrowed against). the accumulated interest will not be substantial enough to make a difference. Similarly for a long duration FD, if you want to liquidate just a few days before maturity, it is advisable to take a loan rather than break it. This way one saves a lot on the penalty and reduced interest rate due to pre-mature closing.

If you are somewhere in the middle, one has to make an assessment on the difference between the FD interest rate vs. prevailing interest rate, how long do you need the funds for, and how much do you lose due to premature withdrawal.

Q4: What is the ideal tenure of an Fixed Deposit?

rule of thumb: make it long enough that it is meaningful and earns you a decent interest rate. However don’t make it so long that you are locked in and cannot use when you need it. The purpose of FD and money is storage of wealth and what good is a stash if it cannot be accessed easily. If you want to park the funds for 2 years and interest rate for a 365 day FD is same that for 2 years, then go for 1 year FD and renew it on the second year (provided you believe interest rates are not going to change) this way if you want to premature withdraw the funds, then you loose lesser money.

Q5: Should you opt for monthly, quarterly or interest payment at maturity

If the amount is small and the duration not in decades then it hardly matters. However a periodic interest credit in your account is a good reminder that you have and FD and at maturity it needs to be processed.

Here is the Citibank India’s Fixed deposit interest rate

Tenure In Days 7-14 15-25 26-35 36-45 46-60 61-90 91-150 151-180 181-270 271-400 401-731 732-1095 1096-3659 >=3660
For amount <1 crore* 3.00% 3.25% 3.50% 4.50% 6.25% 7.75% 7.00% 7.75% 7.00% 7.75% 7.50% 7.75% 6.75% 6.75%

Although one of the lest glamorous of the investment instruments, bank fixed deposits are widely used by individuals and corporate to park their surplus. It is flexible, but it is not as simple a instrument as it appears to be.

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