Interest Rate On Fixed Deposit: Are They Good Or Bad?

Interest Rate On Fixed Deposit

Interest Rate On Fixed Deposit

Amid harsh news on inflation, geo-political matters, and supply chain disruption, there is a reason to cheer for some investors. Banks have increased fixed deposit interest rates

Interest Rates On FDs – Good Or Bad?

After a few years of dealing with low-interest rates, FD investors have a ray of hope as the Reserve Bank of India (RBI) increased its key policy rate. RBI hiked the repo rate by 0.5% to 5.40%. This increasing interest rate scenario is good for FD investors. 

It is the third consecutive hike this year. Banks, expecting more hikes, have started increasing FD interest rates. The next meeting of the Monetary Policy Committee (MPC) is planned for the end of September 2022. The RBI kicked-started this policy rate hike in May (0.40%), followed by a hike in June (0.50%). 

How Can Individuals Take the Benefit of the Likelihood of Increasing FD Rates?

– Investors can ladder FDs with different maturity dates to maximise returns. 

  • When FD interest rates are expected to rise more, investors can consider laddering their money in multiple fixed deposits. 
  • Investing in multiple FDs with different tenures will improve liquidity and help to earn consistent returns. 
  • For example, if you have Rs. 3 lakhs to invest in FDs, you can open five or six FD accounts with different maturity dates, say two, three, or four years, etc. In case of financial urgency, you will need not withdraw the entire FD amount. You can withdraw one FD and let the remaining funds earn at the fixed interest rate. 

– Investors can stick to short-term fixed deposits. 

  • After completing the tenure, you can renew your fixed deposit and earn more at a higher interest rate on fixed deposit. 
  • In case of emergency, you will need not withdraw the entire amount from FD with a long-term lock-in period and lose interest. Instead, you can close a short-term FD prematurely to meet urgent financial requirements.  

Banks offer an online calculator for a fixed deposit – calculate your returns before opening an FD account.

Factors Impacting FD Interest Rates – Maximise FD Returns

  1. Type of FD: There are two types of FDs, cumulative and non-cumulative. Investors can consider cumulative FD over non-cumulative FD for higher returns. It keeps reinvesting the interest amount quarterly and offers higher returns with the compounding power. You will receive the accumulated amount, principal and interest, at maturity. You need not be involved in hefty calculations. Use an online interest calculator for a fixed deposit – calculate your returns for both FDs.
  1. Avoid Premature Withdrawal: You should choose the right tenure at the time of opening an FD account and invest those funds that you will not need until the maturity date. Premature FD withdrawal lowers your returns. If you think that you will need funds in the near future, you can choose a short-term FD.
  1. Consider a Tax-saving Fixed Deposit: You can open a tax-savings FD account that offers tax benefits under Section 80C, Income Tax Act, 1961. You need to deposit your funds for 5 years without the facility of premature withdrawal. 
  1. Find a Bank Offering High-Interest Rate: You can open your FD account with a bank offering as high as up to 7% interest rate. It will help you to grow your funds and accumulate a large corpus over the FD tenure.

Thus, the rising interest rate on fixed deposits allows your funds to grow with safety and higher assured returns with banks.

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