Avoid Paying a Penalty on Premature Withdrawal of Fixed Desposits

Fixed Deposits (FDs) are one of the safest investment options that ensure guaranteed returns over a set period. People looking forward to assured returns generally opt for FDs. The easy liquidity option of FDs is another lucrative feature that makes investors choose them as an investment option. Premature fixed deposit withdrawalenables you to access the funds whenever needed without complications. Since financial emergencies are unforeseen, FDs help access money when needed.

There is a catch, though. When you opt for this facility, you may have to pay a penalty. The penalty reduces your total earnings. Worried investors would be happy to know there are ways by which you can avoid paying such a penalty. Read on to know more.

Top 3 Ways to Circumvent the Premature Withdrawal Penalty of FDs

Here are some suggestions on how you can avoid bearing the premature penalty applicable to an FD:

Opting for a Sweep-in Facility

One of the easiest ways to avoid bearing the penalty charges for premature withdrawal of an FD is to opt for a sweep-in facility. Under this, you permit the bank to shift the additional amount over a preset from your savings account to a sweep-in deposit. To be eligible for this facility, you must open an FD of at least Rs 25,000 with your bank.

Every bank has a different name for this facility, and the ICICI Bank names it ‘flexi deposit’. Also, the tenure of the investment and the interest rate differ from one bank to another. Irrespective of that, you will earn a higher interest rate than a standard savings account.

Additionally, it helps set aside funds and build a corpus, which investors can use during emergencies without digging into regular investments. Also, the highlighting factor here is that investors don’t need to bear any penalty charges if they withdraw funds, and the remaining balance, if any, continues to accrue interest.

FD Laddering

FD laddering is another way to avoid paying the penalty when prematurely withdrawing money from an FD. This plan aims to invest in multiple FDs for different tenures. According to financial experts, this is the best way to manage the liquidity of the investment and get the best return on Fixed deposit. All you need to do here is to divide your lump sum investment into smaller amounts.

FD Laddering is understood best through an example where an investor operates on a total investment corpus of Rs 10 lakh. Now, you break this fund into four FDs of Rs 2 lakh, Rs 3 lakh, Rs 4 lakh and Rs 1 lakh. You can choose four different investment tenures for each of them. In this way, you will have FDs maturating after every year and have enough liquidity to manage any financial needs.

Also, if you are planning any expenses in the future, you can use this method to invest funds accordingly. For instance, you are planning to go on a trip next year that will require Rs 1 lakh, and you can then invest this amount for just a year and get the benefits of it.

Moving ahead, borrowers have the liberty to choose the ladder as per their suitability and need, with no thumb rule being applicable here. You can just compare FD plans from different financial institutions and then opt for one that suits your requirements.

Get a Loan Against FDs

The next strategy to avoid penalty charges on FD is to opt for a loan against it. Almost every financial institution that allows you to open an FD also offers you a chance to use it as collateral to get the necessary funds.

There are two upsides to this facility. These are:

At first, the interest rate charged on this loan is significantly lower than other unsecured options in the market. Your repayment burden remains low.

The next benefit is that, even if you are mortgaging this deposit, you will continue to earn interest on it. Essentially it is offering you a double benefit. You are not paying any penalties due to the premature withdrawal and earning interest while leveraging it for credit.

Apart from that, the application process for this loan is straightforward, and the approval does not take much time. If you face any financial crisis, this can be a great alternative to liquidating the investment.

These are some ways to avoid paying penalties for the premature withdrawal of the FD. But the question is, what is the harm in Prematurely Withdrawing Money from an FD? Well, let’s check this out.

Drawbacks of Prematurely Withdrawing Money from an FD

Here are some of the drawbacks of withdrawing the fixed deposit before maturity:

Hinders Your Financial Growth

Besides paying the penalty charge for prematurely withdrawing, the major disadvantage of withdrawing an FD is that it hinders the investor’s financial growth. Since the FD has a guaranteed return, taking it out before the term will reduce the return investors are supposed to earn.

An FD is part of your financial planning. A premature withdrawal disrupts that arrangement.

Your Monetary Loss Will Be Significant

The next drawback of liquidating this investment before the term is that investors suffer significant financial losses. Apart from bearing the penalty charge, they also lose much money as interest, which they would otherwise earn.

The Process Is Very Complicated

Liquidating an FD is complicated. First, you must inform the financial institution you have the deposit with and then complete the paperwork to get the funds.

Conclusion

FD is a popular investment instrument, and when kept till maturity, it can bear great results. Financial emergencies can come unannounced, and you don’t always need to liquidate the investment to deal with them. Instead, you can use the alternative options mentioned to manage your requirements and avoid the premature withdrawal of an FD.

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