Floating-rate fixed deposits (FRFDs) are a type of fixed deposit where the interest rate is linked to a benchmark or reference rate rather than remaining constant throughout the tenure. These benchmark rates may include the RBI repo rate or government treasury bill yields.
As the reference rate changes over time, the interest earned on the deposit may also increase or decrease. This makes floating-rate fixed deposits different from traditional FDs that offer a fixed interest rate for the entire investment period.
What are Floating Rate Fixed Deposits (FRFD)?
A traditional fixed deposit is one of the most popular investment option among Indian investors, owing to its safety and guaranteed returns. When you open a fixed deposit, depending on the financial institution and prevailing interest rates, you can expect a rate of return that remains constant throughout the deposit tenure.
On the other hand, a floating fixed deposit allows you to earn greater returns depending on the market conditions. Whenever the Reserve Bank of India increases the repo rate, the floating FD rates also increase, resulting in greater returns. For this reason, investors with a greater risk appetite opt for floating-rate FDs over conventional fixed deposits.
If you are looking for investing fixed deposit, then you can consider Bajaj Finance FD, as they offer one of the highest interest of up to 7.75% p.a.
Additional read: How to download your Fixed Deposit receipt
How to calculate returns on Floating-rate fixed deposits?
Calculating returns on a Floating Rate Fixed Deposit (FRFD) can be more complex than a traditional FD because the interest rate changes in line with a benchmark rate. Since returns vary over the deposit tenure, investors need to consider both the benchmark movements and the frequency of rate revisions.
Step 1: Identify the Principal Amount
Determine the amount invested in the floating rate fixed deposit at the start of the tenure.
Step 2: Check the Benchmark Rate
Find the benchmark linked to the deposit, such as the RBI repo rate or a treasury bill yield.
Step 3: Understand the Applicable Spread
Review the additional spread or margin offered over the benchmark rate, as specified by the financial institution.
Step 4: Track Interest Rate Revisions
Monitor how often the interest rate is revised during the deposit tenure and note any benchmark changes.
Step 5: Estimate the Final Returns
Calculate the interest earned for each rate period and combine the earnings to estimate the maturity value of the deposit.
Features of floating rate fixed deposit
Let us take a closer look at some of the key features of FRFDs.
- Opening the FD: Any individual, joint investors, minors, and Karta of HUF can open a floating-rate fixed deposit.
- Minimum and maximum deposit: The minimum and maximum deposit amounts are Rs. 10,000 and Rs. 1 crore.
- Interest rates: As previously mentioned, the returns of these FDs are linked to reference rates or the average yield at 91-day Treasury Bill auctions held in the preceding three months by RBI. The interest changes every quarter, allowing investors to enjoy good returns.
- Deposit period: While booking a floating fixed deposit, you can choose a deposit period between 1 and 10 years.
Additional read: Monthly interest rates for Rs. 3 lakh fixed deposit
Benefits of floating rate fixed deposit
FRFDs come with several unique features that set them apart from traditional fixed or term deposits. A floating-rate fixed deposit offers the following benefits, making it attractive to investors:
- If the repo rate follows an increasing trend, the investor also enjoys a higher rate of interest.
- The interest is paid every quarter on the last day, thus generating a regular return on investment.
- A depositor can avail of a loan or an overdraft equal to 90% of the value of the FRFD amount. The interest on the loan will be 2% above the deposit rate or at the bank manager’s discretion.
- Senior citizens get an additional 0.5% interest. Thus, if the current repo rate is 6% and the markup is 0.5%, then the FRFD offers returns of 6.5% per annum, whereas senior citizens will be paid 7% interest per annum.
- There is no penalty for premature withdrawal for senior citizens.
- Investors can get the benefit of the changing interest rate without closing and reopening the fixed deposit account.
Additional read: Fixed deposit interest rates
Traditional fixed deposit vs floating rate fixed deposit
Let us now see the main differences between conventional and floating fixed deposits.
| Parameter | Traditional FD | Floating-rate FD |
| Interest rate | The interest rates of tradition FD remain constant till the maturity date. | Floating-rate fixed deposits have their interest linked to a benchmark interest rate. For this reason, the interest changes often and is revised according to the underlying reference rate. |
| Ease of understanding | As these FDs come with fixed terms, they are relatively easier to understand. | These FDs are a little more complex and can be confusing. |
Conclusion
If you, as an investor, want to bet on the direction of inflation and future interest rates, you can opt for floating-rate FDs. These fixed deposits offer higher returns during a rising interest rate regime compared to traditional fixed deposits.
Floating-rate fixed deposits come with their unique features and advantages. However, you must assess your risk appetite before investing in floating-rate FD.
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