Skip to main content

Should you break your current Bank fixed deposit and reinvest?

The rate increase is good news for FD investors. But think before you break your FDs


   The only segment of investors who have something to rejoice about in the present times of ever-increasing interest rates is the fixed deposit (FD) holders. FD holders are having a good time. In fact they are in a fix. With frequent rate increases, their old FDs tend to give a lower return compared to the existing interest rates.


   The interest rates can go up to 10-12 percent on FDs in the coming weeks. And it is a safe investment. Bank FDs are a secure mode of investment, giving decent and periodic returns. In fact, in case you opt for the cumulative option, the yield is even higher.


   You just need to factor in the tax part. The interest earned on a FD is subject to tax. You have to pay the applicable tax on in. So, on a FD giving an interest of 10 percent, for an investor in the 20 percent tax bracket, the effective rate of interest is eight percent. Still, it is a good bet. In fact, the returns on these fixed rate instruments is much better than the stock market's returns right now, which is variable, uncertain and prone to risks. An investor seeking fixed income security can lock into a FD. You can get a secured interest income for up to five years. Most banks offer FDs up to five years. Without any risk or uncertainty, you can plan your cash flows.


   The returns from the stock markets may be high, but they come with a risk. Moreover, in times of need, you may not be able to dispose off your stocks, if the markets are down at that point in time. On the contrary, in case of an urgent need, you can prematurely cash your FD and get back the principle plus applicable interest.


   The Reserve Bank of India (RBI) increased the key policy rates by 50 basis points, leading the repo and reverse repo rates to eight percent and seven percent respectively. With this increase in interest rates, the impact may be felt immediately. The quantum of rate increase will be decided in the respective asset-liability committee meetings of banks. The increase could range between 25 basis points and 50 basis points. In the immediate term, the rates on short-term deposits deposits with a maturity period ranging from one week up to one year - will increase. Longer tenure deposits may also follow suit. There is more competition for short-term funds from banks and mutual funds. So, the interest rates will go up sooner in this segment.


   Before deciding to break up your existing FDs and go for ones with higher interest rates, you should make a calculation of the returns and check whether it is beneficial or not. Banks now levy a one percent penalty on premature encashment of a FD. Also, the interest rate applicable is the one that is applicable for the shorter tenure and not the original rate of interest you signed up for.

How It Works?


HERE is a simple case study that shows you how it works when you break up an existing FD for another one at a higher rate.


FD amount: Rs 10,000 Term:

One year Interest rate: Seven percent


If you decide to break this after four months:


Interest rate for four months: Five percent You earn (5-1) four percent for four months: Rs 133 Amount reinvested: Rs 10,133 at eight percent Interest earned for the remaining eight months: Rs 540 Total interest earned: Rs 673 (Rs 540 plus Rs 133) Therefore, effective interest: 6.73 percent


In this case, it is lesser than the original interest rate of seven percent.


If you decide to break this after one month:


Interest rate for one month: Four percent You earn (4-1) three percent for one month: Rs 25 Amount reinvested: Rs 10,025 at eight percent Interest earned for the remaining eight months: Rs 735 Total interest earned: Rs 760 (Rs 735 plus Rs 25) Therefore, effective interest: 7.6 percent


In this case, it is higher than the original interest rate of seven percent.
So, you need to compare the costs and returns before deciding on breaking a FD and reinvesting.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Perpetual SIP - Its Advantages

Retail investors have taken a fancy to investing in mutual funds through systematic investment plans (SIPs). As per industry estimates, Rs 4,000 crore flows into SIPs every month. One way to take advantage of SIPs in a true long-term manner is to opt for a perpetual SIP 1. What is a perpetual SIP? In an SIP , you make periodic investments in a mutual fund scheme of your choice generally every month for a pre defined tenure. While signing up an SIP mandate , you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP . Most fund houses assume this SIP will continue till December 2099 unless you give a written communication to stop it. However, some fund houses require you to tick the `perpetual option'. 2. What are the advantages of perpetual SIPs? Registering an SIP involves a lot of paperwork and it takes time. It is observed that many investors skip their SIP instalments when they go for short-tenure option...
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