People invest in an FD to fulfill their long-term financial goals.
A fixed deposit or FD offers many benefits, such as high-interest rates, flexibility, multiple payout options, tax benefits, loan facility, and whatnot. Additionally, the minimum amount for FD is much lesser than many other investment options, which means almost anyone can invest in an FD.
Despite its many benefits, people sometimes need to close an account prematurely, primarily to fund short-term financial emergencies. This article lists the top-5 things you should consider before completing your fixed deposit account prematurely.
The Top-4 Things to Consider Before Closing Your Fixed Deposit Prematurely
Penalty For Premature Closure of FD
While it is true that you can close an FD whenever you need funds, many financial institutions have a minimum lock-in period. For a one-year FD, the minimum lock-in period may be up to three months. Additionally, they impose a penalty for premature withdrawals, and the penalty amount may be up to 2% of the investment amount.
A Reduction in FD Interest Rates
Although there is a minimum amount for FD, there is rarely any maximum cap on the amount you can invest. Hence, you can invest as much as you can and choose any duration as per your preference. The problem arises when you close the account prematurely. In such a case, the lender reduces the interest rate, and your adequate returns from the investment come down.
Defeats the Ultimate Purpose
It takes grit and courage to arrange the minimum amount for FD and open an account. You often sacrifice your short-term aspirations to create a corpus for your future. The premature closure of an FD makes a roadblock in your dream. In case the emergency is unavoidable, consider applying for a loan against FD. Loan against FD interest rates is generally 2% higher than the highest FD rates. Additionally, your loan term matches the FD term. Hence, it is wise to avoid premature withdrawal if the financial institution offers a loan facility.
Loss of Valuable Time
The premature closure of an FD comes with its own formalities. Generally, it would be best if you visited the financial institution, fill an elaborate form, cite the reason for premature closure, and submit the application form. In most cases, an official representative schedules a meeting with you to discuss premature closure consequences. The representative also informs you of the minimum amount you will lose for closing the FD before maturity. All of these can take anywhere between a half-day to an entire day. Hence, the premature closure of an FD can take your valuable time.
At times, it may seem that you are left with no other option than to pay the minimum amount required for FD closure and withdraw the amount. However, premature withdrawal might do more harm than good.
In case you want to adopt a better approach, consider laddering your investment. Since the minimum amount for FD is affordable, you can divide your total investment into various FDs with varying terms. Keep a major portion of your investment for ten years, and divide the remaining amount into multiple non-cumulative deposits.
A fixed deposit is a guaranteed way to accumulate funds for fulfilling various aspirations. It is better not to shelve your dreams by closing the FD if you can find alternative solutions to the problem.