When a fixed deposit matures, the bank's renewal offer is just one click away. This is the time when deposit holders have to be cautious as the terms of service may change. Without knowing what you are entering into, locking your money into FDs can be risky.
At present, FD investors also need to note the shifting economic conditions in India and globally. Earlier this month, the Reserve Bank of India announced a repo rate hike of 0.25%. This is the rate which influences the returns offered by lenders on products like FD and the interest charged on loans, etc.
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If your FD renewal is due soon, it might be a good idea to first check if your bank has updated the latest rates and what other attractive options are available. Usually, FDs become more attractive when the repo rate is hiked because borrowing becomes expensive. As a result, banks offer higher rates to attract more deposits.
Five Things To Check Before Renewing FD:
1. Check latest rates: Investors must check the renewal rate being offered to them. FD rates can vary across banks and also across tenures. Accordingly you can compare the offers and decide whether you want to renew your existing deposit or start a fresh one.
2. Is laddering more beneficial?: Individuals should check the tenure of their fixed deposits before investing. If interest rates are expected to rise, shorter-term FDs may offer better returns when renewed. By splitting money across one-year, two-year and three-year FDs, savers can reinvest maturing deposits at higher rates. This strategy is called laddering. It allows you to have more flexibility over your money without breaking the entire FD.
3. Check taxation: In India, FD interest is taxed based on your income tax slab. Before renewing your deposit, you can compare whether the gains post taxation meet your financial objective. Based on your risk appetite and investment duration, you can also compare the returns with alternative investments like bonds, RDs, stock market, etc.
4. Check compounding terms: If the goal is to invest in FDs only, investors must not fall for the stated rate alone. They should compare the effective rates offered by banks , depending on how the interest is compounded.
For example,
Bank A offers 7% compounded annually
Bank B offers 7% compounded semi annually
Bank C offers 7% compounded quarterly
All three banks offer the same rate of 7% but the effective rate of these banks will differ from each other. Effective rates of each bank:
Bank A - 7%
Bank B - 7.12%
Bank C - 7.19%
This means that Bank C has the potential to offer the highest rates for your FD.
5. Check changes in terms: Individuals should check the deposit insurance limit and the bank's terms and conditions before investing. They should also understand the penalties for withdrawing money before maturity, as these charges can reduce the overall returns from their fixed deposits.
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Ultimately, FDs are an important investment tool as they offer guaranteed returns and higher liquidity compared to other assets. Still, before renewing your FD you must check all the terms and latest changes in rates and penalties before locking your money again to maximise the growth potential of your deposit.
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