Bank fixed deposit (FD) is one of the most popular investment tools in our country. It is preferred by investors as it is considered to be safe and secure and earn guaranteed returns. Depending upon your need, you can choose FD with a tenure of 7 days to as long as 10 years. Bank FDs can be easily liquidated whenever needed. However, a premature withdrawal will attract some penalty. Like SBI charges a penalty of 0.5% for retail term deposit of up to ₹5 lakh across tenures. However, there are ways to avoid penalty on premature withdrawal of fixed deposit, also known as term deposit
Bank FD Laddering
Bank FD laddering is a technique which involves buying multiple FDs maturing at different time periods. It is a better way to manage liquidity. All you need is to divide your lumpsum investment into smaller investments. For example, if you have ₹5 lakh to invest in fixed deposits, you can break it into five smaller FDs and invest across different maturities. This way you can have five FDs maturing after one year, two years, three years, four years and five years in a row. This way you will have ample liquidity, and if you need money in the interim period, you can opt for pre-mature withdrawal only to the extent of the money required.
For example, if there is a medical emergency and you need ₹2 lakh. If you have one fixed deposit of ₹5 lakh, and you break it you will have to pay the penalty of premature withdrawal charges for the entire amount. Instead, if you have five fixed deposits of ₹1 lakh each, you may choose to break only two fixed deposits. And the remaining money will keep fetching an interest at the rate you booked the FD. You can keep reinvesting and in this way, you will always have ample cash maturing in specific intervals to serve your purpose. You can choose the ladder as per your convenience and requirement, it’s not necessary to divide the entire amount equally. You can also compare the FD interest rates and choose different banks for laddering and take advantage of insurance of ₹5 lakh on your deposits.
Sweep-in facility
The sweep-in’ facility allows your bank to transfer any sum in excess of the amount stipulated by you from your savings account to a sweep-in deposit. Different banks have different names for the facility. For instance, State Bank of India’s savings plus account basically serves the same purpose. HDFC Bank offers it as a sweep-in fixed deposit while ICICI Bank calls it a flexi deposit. The tenure of the deposit varies from one year to five years, and the interest rates also vary accordingly. But by and large, the amount transferred is likely to earn you a higher rate.
In order to be eligible for it, you have to open an FD of at least ₹25,000 with your bank. Apart from offering a better interest rate, the sweep-in facility forms a separate corpus that you can withdraw during emergencies, without touching your regular investments. There is no fees or penalties on withdrawal. Even if you withdraw from the deposit in case of any emergency, the balance amount will continue to earn interest at the same rate.
Avail Loan against FD
You can also take a loan as all banks allow investors to take a loan against their fixed deposits. The interest charged for a loan on a term deposit is generally 1-2 per cent above the interest paid on the deposit. The interest rate, however, depends and varies from bank to bank. For a loan against fixed deposits, the SBI charges interest on a daily reducing balance, without any processing fee and pre-payment penalties. The bank offers loans at 1 per cent above the relatively fixed deposit rate. SBI gives laon for up to 90 per cent of the value of the fixed deposits with the bank.
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