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 is 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
Often overlooked, this is one of the most important steps in the investment journey. Before committing your savings to any financial instrument, it’s essential to clearly define your financial goals and understand your liquidity needs. Consider factors like your income, age, monthly expenses, cash flow requirements, and long-term objectives.
Consulting with a seasoned investor or financial advisor can help you visualise how much money you can comfortably lock into an FD without affecting your day-to-day needs. Once you’ve mapped out your finances, you’ll be better positioned to invest confidently and avoid liquidity shortfalls.
2. Laddering your Fixed Deposits
FD laddering is a smart and flexible way to grow your savings while maintaining easy access to funds. Instead of locking your entire investment in a single long-term FD—say, for 5 years—you can split the amount into two or more FDs with staggered tenors, like 2 years and 3 years.
This approach not only helps you stay invested but also ensures better liquidity management. FD laddering allows you to create multiple FDs with different maturity periods, offering several benefits:
- 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 tenure.
These are a few ways in which you can avoid withdrawing your FD prematurely.
Conclusion
Avoiding penalties on premature withdrawals from your fixed deposit calls for a smart and well-planned investment strategy. By understanding the withdrawal terms and aligning your FD with your liquidity needs, you can minimise disruptions and safeguard your returns.
Keeping an emergency fund separate can also ensure that you don’t have to break your FD early, allowing your investment to grow as planned. With a few thoughtful steps, you can stay financially prepared while maximising the benefits of your fixed deposit.
Looking for a secure and flexible way to grow your savings? Open a Bajaj Finance Fixed Deposit today and enjoy attractive interest rates, flexible tenures, and high safety ratings. Start investing with confidence and plan your financial future, the smart way.
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