MANAGING YOUR FIXED DEPOSITS: RENEWAL OR WITHDRAWAL?

By: Narendra Pratap

FIXED DEPOSITS AS AN INVESTMENT OPTION

Bank fixed deposits (FDs) are a common favourite among Indian investors. Money is held in an FD account for a fixed period of time at a pre-determined interest rate.

The interest rates vary across banks but are guided by market movements.

On maturity, the deposit is either renewed at the new, prevalent rates or the principal and interest accrued are credited to the deposit-holder’s account.

ADVANTAGES AND DISADVANTAGES OF FDS They are a popular draw since they offer guaranteed returns

and capital protection. Subject to a pre-mature withdrawal penalty they also offer liquidity.

For undiscerning investors this mode of investment is also easy to understand and transparent using simple calculations and requiring minimal calculations. It therefore becomes the most easy-to-manage asset class of investors’ portfolios.

The flipside, other than the pre-mature withdrawal penalty, is that this asset class is too safe to provide returns that other riskier options do e.g. equity markets.

MANAGEMENT OF FIXED DEPOSITS The many advantages of fixed deposits prompt

investors (whether domestic or Non-resident), to hold multiple accounts with many banks across different regions.

Since the term to maturity is fixed, investors tend to lose track of their FD holding, once entered into, and their maturity dates (especially long-term holdings).

WHAT HAPPENS IF ACCOUNT HOLDERS DON’T TRACK FD MATURITY DATES? In the absence of any instructions from the holder, the bank will

renew the deposit at the new, prevalent rates for the same tenor. The downside?

The new rates may not be as attractive as they were for the previous tenor due to a downward movement in the interest rate cycle.

Rates on other terms (shorter or longer) are better than the term the deposit is renewed for.

There are more attractive returns to be earned through alternate channels but funds are now tied up in the FD for a subsequent fixed term.

Funds can be withdrawn and re-routed but the withdrawal penalty, usually 1% - 2%, can reduce expected returns.

Investor’s liquidity expectations are compromised.

WHAT CAN BE DONE TO OVERCOME THIS SITUATION?

Banks usually make a courtesy reminder-call to their customers. However, account holders should independently track all their FD maturity dates and amounts.

As the maturity date approaches, holders should assess prevailing and expected movement in interest rates and accordingly instruct the bank to renew the deposit or credit maturity proceeds to his/her account.

INSTRUCTIONS ON MATURITY OF FDS Auto-renewal

Same tenor: If rates for similar terms with the same bank are satisfactory

New tenor: If rates for different terms/periods of holding with the same bank are better

Credit to account If unsure of the rates and term for renewal of the

FD. The savings account interest rate can earn satisfactory returns without compromising liquidity until a decision to re-route funds is made.

To avail of better rates offered by other banks/institutions.

To channelize funds to alternate options for higher returns.

To meet liquidity needs.

WHEN CAN INSTRUCTIONS BE GIVEN TO THE BANK?

During account - opening or anytime on or before the maturity date. Instructions once given can be changed prior to the maturity date.

TRACKING FD RATES

Reviewing and managing one’s finances is as important as choosing the right FD. This is especially true given the frequent changes in rates in current times.