Premature Withdrawals from Fixed Deposits: Pros, Cons, and Guidelines

Premature Withdrawals from Fixed Deposits: Pros, Cons, and Guidelines

If you hold multiple FDs and withdrawing one becomes unavoidable, prioritise breaking the one with the shortest tenure or the lowest interest rate first.

PNN News DeskUpdated: Thursday, May 23, 2024, 02:32 PM IST
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New Delhi (India), May 23:Fixed Deposit (FD) is an important element in the investment portfolios of many Indian savers. Known for their low risk and predictable returns, FDs offer a safe place for investors looking to park their funds away from market volatility.

However, there are moments where you may have to withdraw your FD earlier than you had planned. Before you take this step, let’s learn the pros and cons, as well as the alternative strategies available.

Pros of premature FD withdrawals 

Though not recommended, premature FD withdrawal has limited advantages, such as: 

·      Instant financial relief: Premature withdrawal offers instant access to funds during emergencies. Be it a medical crisis or an urgent home repair, your FD funds can offer a financial lifeline when you need it most.

·      Debt repayment: Using your FD funds to pay off high-interest debt can be a wise move. This can help you save on interest payments, especially when the interest cost on the debt exceeds the earnings from the FD.

·      Liquidity for high-return investments: If the stock market shows promising trends or new investment opportunities emerge, the funds from your FD can help you promptly capitalise on them.

Cons of premature FD withdrawals

Premature closure of FD plans has many disadvantages, such as:

·      Penalty fees: Most banks charge a penalty for premature withdrawals. FD breaking charges can range from a fixed amount to a percentage of the interest amount and reduce the final amount you receive.

·      Loss of interest: Withdrawing your funds early means you will lose out on the interest you would have earned had the FD matured as scheduled. So, you get lower overall returns than you initially hoped for.

·      Impact on financial goals: People book FDs with a specific goal in mind. A premature FD withdrawal can disrupt your financial planning and delay or derail these goals.

·      Compounded growth interruption: The power of compound interest plays a major role in the growth of fixed deposits over time. Early withdrawal interrupts this compounding process and reduces the exponential growth of your investment.

·      Missed benefits: Some FDs allow you to take out loans against them at competitive interest rates. By withdrawing your FD prematurely, you miss a low-cost borrowing opportunity while also impacting your investment's growth. 

Guidelines for withdrawing FDs before maturity and alternative strategies

Before deciding to break your FD early, review these guidelines and alternative approaches.

Choose multiple payout options

When booking an FD, opt for flexible payout options such as monthly, quarterly, or yearly interest payouts. Payout options act like a regular income stream and help you enjoy returns without touching the principal amount. This approach is highly beneficial for dealing with regular expenses or emergencies without breaking the FD.

Take a loan against FD   

Instead of breaking your FD, consider taking a loan against it. This helps you meet your urgent cash needs without losing out on the interest your FD continues to earn. Banks usually offer loans up to 90%-95% of your FD value at competitive interest rates, which are often lower than those of personal loans.

Prioritise FDs wisely      

If you hold multiple FDs and withdrawing one becomes unavoidable, prioritise breaking the one with the shortest tenure or the lowest interest rate first. This minimises the loss of interest or penalties and preserves higher-yielding investments for the longer term.

To sum up

While premature closure of FD can offer quick liquidity and the opportunity to reinvest at higher rates, it comes with many downsides as well. You have to incur penalty charges, lose interest that could have been earned, delay your goals, etc.

Before deciding to withdraw early, consider its impact on your current finances and long-term financial objectives. Also, carefully follow the guidelines outlined above to make an informed decision that best aligns with your overall financial well-being.

It would be wise to choose INDIE Fixed Deposits by IndusInd Bank. You get an impressive interest rate of up to 7.75% p.a., which is among the highest in the industry. 

You can also link your FD to your savings account and make direct payments from the FD when your savings balance is low. This way, you have 24/7 access to your funds, which means no more breaking FDs for cash needs. 

Book your INDIE Fixed Deposit today with a process that is 100% digital!

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