Financial Institute offers a scheme of investment with a great rate of interest for a fixed period. Bank, non-banking financial institutions (NBFCs), and housing finance companies (HFCs) come under the Financial Institute.
The rate of interest for FD is higher than that of the saving account. At the end of the chosen tenure, one can withdraw the amount with interest. However, an investor can collect the return as per the choice monthly or quarterly.
Also, one can go for reinvesting with the same scheme. Private sector banks provide a slightly higher rate than public sector banks – Fixed Deposit
If an investor chooses to withdraw money before the fixed maturity date is the same as premature withdrawal. One does such things when one faces a financial crisis.
Instead of doing such a thing, it is advisable to find another option of getting funds, for example, opting for a loan against FD. We will see other ways to prevent ourselves from premature withdrawal.
Premature withdrawals: why not?
Bank allows getting the FD before maturity in case of a financial emergency. Premature withdrawals come with a penalty. It is advisable to avoid premature withdrawal from FD. Due to premature withdrawal, It is obvious to lose the interest of remaining tenure.
Also, one has to pay a penalty fee for premature withdrawal. Thus in this way, we lost benefits from both sides. Let’s discuss how we can avoid premature withdrawal.
From laddering to liquidity
Laddering is a great way to prevent self from the premature withdrawal of FD. Instead of investing in one FD with the same rate, it always better to invest the amount at a different rate for different tenure.
Laddering is an investment strategy in that investor invest in more than one scheme with different rate of interest, contrary maturity dates. This strategy helps in avoiding the risk of losing the whole amount. It also helps to ignore reinvestment in unfavorable environments, even recover benefits from favorable environments.
Divide and spread the investment
That is the strategy for how you can adder your investments. Instead of locking or investing the whole amount for the year, one should divide the amount and lock for six months, one year, two years with different rates. When the FD with the shortest term matures, reinvest it.
Do the same process with other FDs at maturity. Take care of balanced monthly income goal competition while implementing the above strategy. Also, spread deposits across various banks with different maturity. These also fulfill liquidity needs for a longer horizon.
If the main concern is liquidity, then the investor should not invest for a longer tenure. Investment for a long period may cause the problem in such cases. Here the sweep-in concept comes into the picture. This concept provides both benefits as it increases the liquidity of a saving account.
A sweep-in FD is like a money multiplayer and also know as a 2-in-1 account. This policy comes with interest rate benefits similar to FD and liquidity benefits similar to saving accounts. Banks do not charge a penalty for using funds. An investor can use funds whenever he or she wants to use them.
If the investor chooses to invest with this scheme of sweep-in, banks convert any amount above a particular limit automatically into Fixed Deposit.
Let’s go with an example. Suppose you have 1.80 lakhs in your saving account, and the threshold value is 25 thousand only. In such a case, the Financial institution will automatically count that 1.55 lakh as FD. Somehow you face financial crises and need funds from that 1.55 lakh, so you can withdraw it, and that whole fund will move as a saving account again.