What Should You Do instead of Breaking Your FD?
By Anupama Deshpande | June 27, 2019

Bank fixed deposits (FDs) are one of the most popular investment avenues. It comes with several inherent features such as assured returns, lowest risk, easy to open and flexible tenures. Almost all banks offer you FDs. FDs tenure ranges from 7 days to 10 years. Some of the banks also offer FD for 20 years. Different bank may offer different rates on their FDs based on various tenures.

People invest in FDs to achieve their short-term as well as long-term goals. One can invest with a goal of getting funds for his child's higher education, other may invest with a goal of buying a car and the like. You can determine the maturity value of your investments by using the Fixed Deposit Interest Calculator, which is a simple tool that you can easily use.

Related topic Best FD Rates for Senior Citizens in India

Sometimes we have an urgent requirement of funds. Investment in bank FDs looks easier to liquidate as it is very handy. So you may think of withdrawing the FD at such time. Withdrawing the funds from FD before maturity is known as breaking an FD. One must understand that if he breaks his FD prematurely (means before its original maturity), he will have to give a penalty. To understand it more clearly, we can take up an example. Suppose you have opted for the 5-year fixed deposit and then break it after 2 years, you will get the interest rate applicable to the 2-year deposit only and then you will also have to give a premature withdrawal penalty of 1% so your net interest will be 1% lower than interest rate applicable to the 2-year deposit.

Hence we can say that:

Interest rate on premature FD withdrawal = Interest rate for the FD tenure for which fund kept with bank - 1%

Though breaking your FD is easy still you may think as to what should you do instead of breaking your FD?. Outlined below are some of the options that you can follow instead of breaking your FD:

If you have a bank FD then you are offered a facility to get a loan to the extent of 90% of the FD maturity value at lower rate. This rate of interest on loan against your FD will be just 1% to 2% more than the FD rate.

Laddering of Bank Fixed Deposits is a process of staggering out your investment into multiple tenures of fixed deposits in order to earn comparatively high returns than normal FD. Laddering is an approach by which you can get an annual stream of income for a long period.

In Laddering of Bank Fixed Deposits, you need to create a ladder as follows:

• Invest Rs. 1,00,000 in 1 year FD
• Invest Rs. 1,00,000 in 2 years FD
• Invest Rs. 1,00,000 in 3 years FD
• Invest Rs. 1,00,000 in 4 years FD
• Invest Rs. 1,00,000 in 5 years FD

First FD will mature after 1 year. If you do not require the funds at that time, you may reinvest it in 5 year FD to lengthen the ladder further. Second FD will mature after 2 years. If you do not require the funds at that time, you may reinvest it in 5 year FD. Likewise, every year you will receive funds from maturing FDs and you will further invest them for 5 years. In this way, a regular stream of funds will come to you every year with interest and you will not have to face any problem of liquidity.

Added advantage of laddering approach is that you will receive higher returns with more liquidity.

You should break down your funds to be invested in single FD into different smaller portions and then opt for separate FDs. In this, if you have urgent need of funds, you will not have to break all the FDs at once instead you can break FD according to your requirement.

Many banks offer Sweep Accounts. Bank's auto-sweep facility is a combination of savings account and FD. Under this, your savings account is linked to a fixed-deposit account and a monetary limit is defined. As soon as the amount in the savings account crosses that defined monetary limit, the excess money is transferred automatically into the fixed deposit. In this way, the excess amount of your savings account earns higher interest. If your fixed deposit is under Sweep In Account, then you can instantly withdraw the funds without any penalty.

Even breaking FD can be profitable in some situations. These may be as follows:

1. When you can earn more returns on the funds of your FD in another investment option.
2. If your other investments are offering better interest than that of your FD. So breaking FD will be the best option instead of liquidating your other investments.
3. When other banks are offering considerable more interest on their FDs than that on your existing FD.
4. When there is no premature withdrawal penalty on your FD and you have urgent need of funds.

• Before making FD, estimate your future commitments and invest accordingly by breaking your FDs in long-term FDs and short-term FDs.
• Before making FD, compare FD interest rates offered by different banks.
• Many banks offer a debit card with their FD accounts and you can withdraw FD money instantly.
• Penalty rates on premature withdrawal of FD may vary from 0.50% to 1% from bank to bank.
• Some of the banks do not charge any penalty on premature withdrawal of FD for FDs upto a certain amount(e.g. Rs 5 lakhs) kept for at least 12 months.
• Before breaking FD, explore all alternate possible solutions.