Why is Breaking a Fixed Deposit NOT a Good Idea

It is not uncommon for Indians to break their fixed deposits to fund various urgent expenses. Be it wedding planning or financing children’s education, Indian investors often fall back on this reliable investment vehicle to meet urgent cash flow needs. However, breaking a fixed deposit is a bad idea since it involves certain costs and earnings loss. In this article, we highlight why breaking a fixed deposit is not a good idea and what alternatives you can use to fund your urgent liquidity needs. 

• Banks levy a 0.5%-1% penalty charge for breaking a fixed deposit before maturity.
• Breaking an FD before maturity lowers investment returns as the applicable interest rate is lowered.
• Instead of breaking an FD, investors can opt for a loan against the deposit or implement FD laddering strategies. 

Fixed deposits are traditional investment instruments that offer guaranteed returns to investors. You can invest a lump-sum amount in a fixed deposit account and earn a fixed interest on the same throughout the selected tenure. Investment tenures can range from 7 days to 10 years, while interest rates vary from 6%-8%. Depending on your cash flow requirement, you can choose from cumulative and non-cumulative FDs. Cumulative FDs pay the principal and interest accrued at maturity, while non-cumulative FDs pay interest at periodic intervals (monthly, quarterly, or bi-annually). As the safest investment option in India, FDs are preferred by conservative investors who seek stable returns and capital protection. Both resident Indians and NRIs can open FD accounts with banks and NBFCs. 

Apart from fixed and assured returns, FDs also offer liquidity benefits. Many investors break their FDs before maturity to meet urgent cash flow needs. However, breaking your fixed deposit is a bad idea. Here’s a list of reasons why breaking a fixed deposit is not a good idea:

• Withdrawal penalty:
  To access your fixed deposit corpus before maturity, you need to pay a penalty charge to the lender. In simple words, if you decide to break your fixed deposit before maturity, you will have to pay a penalty charge for the same. Generally, this penalty charge ranges from 0.5%-1% of the applicable interest rate. However, the penalty rate is subjective and can vary from one bank to another.
• Lower interest earnings:
  This is one of the main reasons why breaking a fixed deposit is not a good idea. Since the bank lowers the applicable rate of interest on your deposit, you inevitably earn less than what you would if you had continued with the investment. Suppose you had invested Rs. 2 lakhs in an FD account for 5 years at a rate of 7.5% p.a. After the first year, you decide to break the FD to meet an emergency expense, and the bank levies a penalty of 1% on this premature closure. In this case, your returns on the investment will be calculated at 6.5% (7.5%-1%) and will stand at Rs. 13,320 rather than the estimated Rs. 89,990 (end of 5 years at 7.5%). In simple terms, breaking a fixed deposit is a bad idea because you lose out on earnings. 

Now that you know breaking a fixed deposit is not a good idea, here’s a list of alternatives you can consider to manage your immediate liquidity needs:

• Loan against FD
  Instead of breaking your fixed deposit investment, you can avail of a loan against the corpus to meet your cash flow requirements. Banks and NBFCs offer secured loans against FDs (except tax-saver FDs), where you can pledge the FD corpus as collateral. Depending on the policies of the lender, you can secure up to 90% of the corpus value as a loan. Additionally, the interest rate is just 1%-2% higher than the FD rate, making it a much more affordable option than a regular personal loan.
• FD laddering
  Laddering your FD investments is a prudent investment strategy you can implement to avoid breaking your fixed deposit in times of need. Instead of investing a large lump sum into one FD, you can break your investment amount into smaller, piecemeal portions and invest them into separate FDs with different maturity tenures. This strategy provides you with steady returns and easy access to funds at regular intervals. 

Fixed deposits are some of the most reliable and secured investment vehicles available to Indian investors. Breaking your fixed deposit is a bad idea because doing so results in penalties and lower interest earnings. Instead, you can opt to avail a secured loan against your FD corpus or implement the laddering principal to create a steady stream of income. While it’s generally a bad idea to break an FD, in some instances, it might make sense. For instance, if you have a better investment opportunity that pays higher interest or if the penalty is low and the general rate of interest has risen it may be better to break the FD and reinvest the amount. Similarly, if you have a high-interest personal loan, breaking your FD makes sense to avoid interest build-up and the negative impact on your credit score.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 7.75% p.a.