One of the most common ways of saving or investing money is in the form of fixed deposits. Every bank provides you with a fixed deposit service. This facility allows you to earn interest on your savings. Usually, the period of a fixed deposit can be anywhere from 7 days to 10 years.
Apart from this, FD is one of the best saving options just because it offers convenience to invest. One can choose to invest in any out of different types of fixed deposits like recurring, short term and long term as suited. Depending on the duration of the deposit, you receive a varying percentage of interest. However, there is one situation which a lot of investors deal with on a daily basis. It is related to the how to premature withdrawal of fixed deposit.
Most people think about breaking their fixed deposit when they are in need of money. But what they forget are the consequences of doing the same. Like every financial investment, following the maturity line on your fixed deposit is also essential.
In this article, we will tell you about all the disadvantages of premature withdrawal of fixed deposits. The numbers of reasons described here why one should not go for premature withdrawal of fixed deposits.
- Penalty Charges
A consequence that a lot of you might be familiar with already is the penalty charge applied. Whenever you decide to withdraw your fixed deposit before the maturity, there is a certain percentage of penalty deducted. Although the percentage of penalty is not that high, it can accumulate quickly if the FD is of a significant amount.
Hence, if you have a fixed deposit of Rs.5 lakh or more, then there is a chance that you might have to pay a hefty penalty charge. This is the biggest reason why it is considered bad when you make a premature withdrawal of fixed deposits.
- Reinvesting Time Frame
When an investor decides to break his fixed deposit before maturity, the bank usually gives him multiple options. One option is to save a bit of interest by committing to reinvest the amount in a given time frame. This is usually considered beneficial for investors who need funds for a short duration.
For example, if you require your FD amount for only a month, then you might be able to save on interest by reinvesting it as soon as possible. However, this time frame is usually less. Hence, premature withdrawal of fixed deposits is considered a disadvantage by most people.
- Deciding interest rate
The Reserve Bank has given complete authority to banks when it comes to deciding the interest rate. This means, at any given point of time your bank can make changes to its interest rate percentage.
Similar to this, an interest rate that you get while opting for the premature withdrawal of fixed deposits is also decided by the bank. It means investors have no say whatsoever in the interest rate decision. You will always have to agree with what the bank offers.
- Implied Interest
The interest rate which is applicable during the time of premature withdrawal of fixed deposit is same as decided in advance. There are no changes made whatsoever, which means it can prove to be a loss for investors.
To explain it in simple words, imagine that your FD in the third year of its maturity. You will be receiving interest rates similar to the first year. It means whatever the deposit duration might be; the interest rate will be constant.