Parking savings in stable investment instruments like the Fixed Deposit has been a practice for many Indians for ages. This is a smart way of managing excess income and savings. Investors get additional value for their money over a fixed period, which also helps beat inflation. Not only is your money safe in an FD, but it also grows steadily. However, this instrument has a lock-in period and fixed date of maturity but one could need liquid cash before maturity in case of an emergency or unfortunate circumstance. In such situations liquidating the FD could be one option.However, exiting the investment early causes interest rate loss or even penalties can be levied. Here’s all you need to know about how you can avoid premature FD withdrawal because one essentially saves money for a rainy day.
What is premature withdrawal?
Premature withdrawal is essentially liquidating a part or your entire investment before the chosen maturity date. This could be needed for reasons varying from emergency fund requirements to funding some financial requirements that you did not foresee while making your investment decision.
This can definitely help you tackle your situation however could lead to a penalty charge or loss of interest rates or both. Here’s how you can avoid premature withdrawal of your FD.
4 ways to avoid premature FD withdrawal
Here’s what you can do to avoid getting in a situation where you would have to withdraw prematurely:
1. Plan and structure your investments based on your financial goals
This is the most underrated yet the most crucial step of making investments. You have to be very clear about your financial goals and liquidity requirements before parking your savings in any instrument. Essentially you should consider your income, age, expenses, liquidity requirements and future financial goals in the picture before investing in any instrument. Taking the help of an experienced investor or professional can help you in visualising how much you can lock in and still not face any liquidity crunches. Once you have this cleared you can be confident in your FD investment.
2. Laddering your Fixed Deposits
This is another smart way of growing your money without having to compromise on liquidity. Instead of choosing a longer tenor like 5 years, you can split your investment into two separate FDs of tenors 2 years and 3 years. This will enable you to actually make an investment and manage liquidity effectively. Laddering is an easy strategy which enables investors to open multiple FDs of different tenors instead of just one FD of a longer tenor. This serves in the following ways:
- Offsets risks
- Benefit of liquidity
- Can take advantage of interest rate hikes while reinvesting
- Those who do not have a sizeable corpus can also start investing with a smaller amount without waiting around to first collect a chunk and then invest
Here is an example to break it down even further. So instead of investing say Rs. 5,00,000 in a fixed deposit you can plan and divide the principal amount into 3 separate FDs. The tenors will be different for all FDs. 1 year, 1 year, 3 years or 2 years, 1 year, 2 years, etc. based on liquidity requirements.
3. Loan against FD
Taking a loan against your FD is the best way of making sure you do not lose out on interest. Many NBFCs offer this facility where you can easily avail of a loan against your own FD instead of withdrawing or breaking it. Bajaj Finance offers this facility as well. You can get up to 75% of your FD amount as a loan. This makes it easier to repay as well.
4. Invest in SDP instead of an FD
Bajaj Finance offers another investment tool that has the inherent property of an FD but it functions like a SIP sans the market risk. Here, investors can make small monthly deposits starting at just Rs. 5,000 instead of having to save up a chunk. Every month their account is auto debited of the fixed amount like a SIP. But this is like having small separate FDs and at maturity, you can avail of the entire principal amount along with accrued interest over the tenor.
These are a few ways in which you can avoid withdrawing your FD prematurely.