Penalty charges might have to be paid by investors for exiting from a scheme before its completion
THERE are often times when exciting investment opportunities fails to pull in investors. Even if the scheme is attractive, this happens due to various reasons and factors that holds back the individual from taking the necessary steps.
In the world of investment, missing opportunities is a common feature for investors. This is the reason why each investor should keep a plan ready that can tackle all possible options coming their way.
With the banks increasing their fixed deposit rates sharply, a similar situation is now being witnessed.
Investors, who have already invested their money in fixed deposits previously, are looking to benefit from the change in the situation. This calls for some work and here is how this process can be undertaken.
Current position: Various banks have been raising fixed deposit rates that they offer for schemes of various tenures.
Some banks have raised fixed deposit rates quite a few times in the last few months with the end result being that the highest rates offered by them is in the range of 8.5 per cent to 9 per cent range now.
This is an attractive rate, but the situation that many investors will face is that they might already have an fixed deposit that is earning a certain rate of return.
As investors witness a rise in the rates offered by other banks, there is a general tendency to want to shift from the existing deposit to the new one.
The question is when is this beneficial and what are the factors that need to be taken into consideration in the entire decision making process.
Difference in rate: The first thing that has to be seen is that there has to be a difference in the rates that are being offered compared with what the individual is already earning.
So, it will make sense to go ahead with the process only when the rates that the investor can get for deposits are higher than what they are already earning in the present scheme.
For example, an investor earning 7 per cent in an existing deposit would want to check out the position if the bank is now offering a rate of 8.5 per cent.
However, someone who is already earning 10 per cent in an existing deposit would not want to make any change as there is no benefit here.
Charges: Investors need to know that in order to shift money to a new fixed deposit scheme there will have to be a stoppage of an existing deposit that has not run its full course.
This will result in some charges that would have to be paid by the investor for exiting from the present investment scheme before its completion. This can be in the form of a lower rate of earning or in the form of a penalty.
Take, for example, a situation where the rate for a three year deposit is 7 per cent and the rate for a two to three year deposit is 6 per cent.
Now, if the deposit is broken after two years and two months then the rate of 6 per cent will be applicable for the investment. This means a loss of earnings of 1 per cent on the deposit.
Actual decision: The final decision to switch to a new fixed deposit scheme should be undertaken only when there is a net benefit coming in for the investor.
First the extra benefit needs to be considered on one side, so if the earnings are higher by 2 per cent in the new deposit and the amount being invested is Rs 100,000 for a period of two years then the extra gain is Rs 2,000 per year.
Compared with this if the penalty on termination of the existing fixed deposit scheme is less than this, then the change will be a beneficial decision.
This can become a bit complicated with differential period of deposits but simply comparing the extra gains with the expense on the other side shall provide the necessary picture.
