Several factors affect the interest rate on your Fixed Deposit, just as they would affect the interest rates offered on a loan or the premium offered on insurance. While the general economic climate of the country will have a significant role to play, there are factors specific to your application that issuers will look at when offering you an FD rate, one of which is the tenor of your FD. Here’s how.
1. Choose a longer tenor for higher interest rates
Most issuers offer higher interest rates for long-term FDs. For example, for a 24-month FD, Bajaj Finance offers a 0.55% higher interest rate than an FD for 12 months for the cumulative variant and a 0.53% higher interest rate for the same tenor on a non-cumulative FD with a monthly payout. Issuers offer better rates for long-tenor FDs specifically to motivate long-term investments. If you need to access the money at regular intervals, you can still invest it for a longer time frame and opt for a non-cumulative variant.
2. Protect your corpus from market fluctuations with long-term FDs
The interest rate on FDs does not fluctuate the way it does with many other forms of investment. This means that your money earns stable interest throughout the tenor. A long tenor means long-term protection against market fluctuations. In the case of a short tenor FD, assuming you do not immediately renew your account or your issuer has reserved the right to re-assess the interest payable, you run the risk of needing to reinvest at a lower rate of interest, once your investment reaches maturity.
3. Reinvest interest for higher returns
While you may have the option to withdraw the interest earned on your FD (when you choose the non-cumulative variant), reinvesting the interest earned will offer you higher returns in the subsequent year since the interest is earned on the total amount. The longer your FD tenor, the more opportunity you have for reinvestment, and the larger your returns will be. Thus, choosing cumulative FDs over a tenor of 36 to 60 months is highly lucrative. For example, you can invest as low as Rs. 15,000 with Bajaj Finance and get a return of 8.10% p.a. on your investment for 44 months.
4. Choose auto-renewal to get a higher interest rate
Many issuers offer you a higher interest rate if you sign up for the auto-renewal facility. The benefit of this is two-fold: one, you don’t have the hassle of keeping track of renewal dates and paperwork, and two, you can avail of a competitive rate of interest for a longer tenor.
Therefore, a long tenor FD offers you better interest rates than a short tenor one and there are also indirect ways in which a long tenor FD offers you a higher return on investment. In conclusion, opting for a long tenor FD is sure to pay in the long run.
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