ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

FIXED DEPOSITS-Should You Break An Old FD When There Is An Increase In Interest Rates?

Updated on January 18, 2011

INDIAN RUPEES

Source

Bank Fixed Deposits (FD's) Are A Safe Investment Instrument

Fixed Deposits, commonly called FD's are the safest investment instrument. Savings in the form of Fixed Deposits with a bank are the easiest. You earn interest that is higher than that of a savings account, for a fixed period of time varying between 15 days and 5 years.

Rising interest rates signify an overburdened borrower because of expensive loans. But when rising interest rates are applied to Fixed Deposit rates, investors set to gain. Suddenly, Indian bank fixed deposits see a significant increase in interest rates, in the range of 0.25 -1.5 %. If you are contemplating like me, as to whether you must break your old FD's and make fresh FD's in order to benefit from the increased interest rates, let us take a look at the pros and cons and decide which is better.

As an investor, you should consider each of your FD's and take into account the maturity date and see how much time there yet is for this date. Each bank has a different interest rate applicable, a different penalty for premature withdrawal and so you need to view each bank's FD with the interest rates of that particular bank and the penalty for premature withdrawal as well for you to arrive at a conclusion.

If an FD is nearing maturity, it would be wise not to opt for a premature withdrawal, as you will then lose some interest on that deposit. This is because the interest is calculated on an annualized basis. This loss may be greater than the income you might gain if you make a fresh FD with the new increased interest rates.

Example: If you had invested in an FD about 4 months back for 1 year @ an interest rate of 7.5 %, and decide to break it, so as to reinvest afresh at today's interest rate of say, 8 %, then the rate applicable for 4 months will be applied, which may be 5.5%. This is a loss of 2 % on annualized interest. In addition, a penalty for premature withdrawal is applied, which may be 1-2 % depending on the bank.

Bearing the above in mind, one needs to check if the FD in question will earn you more on breaking it, or keeping it until maturity. Where the interest rates are higher and are able to compensate the penalties or lower rate for the tenure invested for, you could opt for the switch. But, if your interest rates have seen an increase of 0.5 %, and the penalty for premature withdrawal is also 0.5 %, it would be wiser to retain your old FD. And you can make some fresh Bank FD's to avail of the new attractive interest rates.

What My Bank Advised Me - How To Still Benefit With My FD's

My Bank no. 1: In order to take advantage of the new increased interest rates on FD's, and not lose on my old FD's by breaking them, they advised me to opt for an extension of my old FD"s. This means that until the present date, my FD will earn the old interest rate, and this will be added on to the original sum making the total amount the principal for the new FD. This new FD will bear a new maturity date (between 1-5 years as opted by me) with the new increased rate of interest. Since there is no withdrawal, no penalty is levied and I still gain from this FD. This method is called an Extension of the FD.

My Bank no. 2: I was advised to wait until Jan 25,2010, for another increase of at least 0.5 % in interest rates was expected. This bank does not charge any penalty for premature closure if the amount is being reinvested with them.

All banks may not offer such schemes, and it would be wise to cross check with your bank manager, before you take a decision.

Interest Rates On Bank FD's Upto Rs. 15 lakh(as on Dec 20,2010)

Banks In India
6 months-1 year
1-2 years
2-3 years
 
State Bank Of India
7.25
7.75 -8.5
8.25 -8.5
 
Central Bank Of India
8.0
8.25
8.25
 
Union Bank Of India
7.0 -7.25
8.0 -8.6
8.0
 
Corporation Bank
7.4 - 8.0
8.1 -8.4
8.1
 
Canara Bank
7.25
8.25 - 8.3
8.25 - 8.6
 
Bank Of India
6.5 - 6.75
8.25
8.25
 
Bank Of Baroda
6.0 - 6.25
8.0 -8.35
8.25
 
Axis Bank
6.25 -7.25
8.0 -8.25
7.75
 
HDFC Bank
5.5 - 6.75
7.5 - 7.75
7.75 - 8.25
 
IDBI Bank
7.25 - 8.15
8.15 -8.5
8.25
 
ICICI Bank
5.75 - 6.5
7.25 -8
7.5 - 8.25
 
 
 
 
 
 

New Indian Rupee Symbol

Comments

    0 of 8192 characters used
    Post Comment

    • Pamela99 profile image

      Pamela Oglesby 

      7 years ago from Sunny Florida

      Excellent information. I have always kept a money market account and the retirement funds, but have never tried the FD's. Thanks for the information.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)