PREMATURE WITHDRAWAL OF FDs
WHAT IS PREMATURE WITHDRAWAL OF FD?
Investing in an FD is done by many investors as it is considered to be one of the safest and secure ways to gain average returns while not risking the principal amount invested. Usually, an FD spans out in a few years. Premature withdrawal of FD would mean withdrawing the amount invested before the tenure comes to an end. Typically, investors opt for this in terms of financial emergencies and difficulties to cater to their needs.
EFFECT ON THE INTEREST RATES
The FD interest rates will ultimately go down if investors go forward with premature closure of their FD. Nevertheless, the depreciation on the interest rate depends on the plan provided by the bank. Here is an instance of how the penalty is ascertained by the banks as a result of premature withdrawal of the FD account.
Consider an investor invests Rs. 1,00,000 for two years at an interest rate of 6%. The FD account break charge at year one is 1%. So, the actual gains considered for the invested principal will be only 5%.
DISADVANTAGES OF PREMATURE WITHDRAWAL
Premature withdrawal of an FD may seem the ideal option in case of contingency or emergency. However, there are certain demerits related to premature withdrawal:
- By withdrawing the FD account before the maturity tenure, the investor loses the opportunity to earn benefits from the power of compounding.
- Most banks charge a penalty amount or percent against the premature withdrawal. The penalty levied on premature withdrawal hovers in the range of 0.5 to 1 %.
- It is a very complex and cumbersome process and takes a lot of time. The investor is required to sign all the relevant and needful documents and meet the concerned officer to get FD closed.
- Unlike shares which are very dynamic and volatile, FDs provide guaranteed returns ranging between 5 to 7%. Premature withdrawal may cause a strain on investors’ financial health. Further, early withdrawal can cause uncertainty when one loses out on a financial source.
HOW TO AVOID PREMATURE WITHDRAWAL
1. Avail Loans:
FDs usually allow investors to avail a loan against them. Typically, the interest charged on this loan will be 1 or 2 % higher than the interest paid through FD. However, the interest rate of this loan will be less than that of a personal loan.
2. Leverage sweep-in accounts:
Sweep-in FDs provide an interest rate for FD and liquidity identical to that of a savings account. Besides, there is no penalty levied on a sweep-in account on premature withdrawals.
3. Using laddering approach:
In easier words, laddering translates to diversifying portfolios. So, invest in different FDs with different terms ends, and maturity periods to reduce the risk. Before investing, one should surely take a look at the FD calculator by ZFunds to make a better choice.
1. How is the penalty for premature withdrawal calculated?
The penalty charged upon the premature withdrawal of fixed deposits varies across all FD providers. The amount charged by the bank is usually 0.5% for deposits less than Rs. 5,00,000 and 1% for deposits above it.
2. What happens if an FD is withdrawn before maturity?
Premature withdrawal is the process of withdrawing the FD before maturity. When investors opt for it, they get a lower return and also have to pay a penalty for the early withdrawal.
3. How can investors avoid premature withdrawal?
Investors can avoid premature withdrawal by doing any of the following:
- Avail Loans
- Using Laddering approach
- Leverage sweep-in accounts