Skip to main content

Should you sell old FDs to gain from new rate?

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.

In other cases there is a direct penalty of 1 per cent to 2 per cent for premature withdrawal of the deposit. Either way this represents a cost for the individual.

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.

 

Popular posts from this blog

Real Returns in Investing

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Real Returns in Investing     A Anil Singh (name changed), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table. Anil's savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table. Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The v...

Budget 2014 Highlights for Saving

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

ICICI Prudential MIP 25 - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential MIP 25     (CRISIL Rank 2)   This scheme was launched March 2004. Please see the chart below for the one, two, three and five years annualized returns from this scheme. The minimum investment in the scheme is Rs 5,000. The asset allocation of the portfolio is 24% equity, 72% debt and 4% cash equivalent and others. Please see the chart below for the monthly dividends declared by the scheme, on a per unit basis, over the last 5 years.   For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mai...

Franklin India Smaller Companies Fund - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Franklin India Smaller Companies Fund   While the universe of small-cap stocks in India is vast, there are very few equity funds which take on the task of sifting through this space for good long-term bets. Franklin India Smaller Companies Fund has managed this with aplomb. What we like about this fund is its significant out-performance of its category and benchmark over the last four years, and its ability to moderate portfolio risk despite investing in the riskiest segment of the equity market. This fund's stock selection strategy, like that of Franklin India Prima Fund is focused on finding companies that generate positive cash flows across business cycles. High return on investment and manageable leverage are also filtering criteria. Says R. Janakiraman, fund ma...

How to open a Capital Gains Account?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to open a Capital Gains Account? You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account. Investment in Specified Bonds Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now