Is it the Correct Time to Break-free your Fixed Deposit and Re-invest?
The rates offered currently on FD for 5 to 7 year deposits have reached as high as 10.5%. This rate is offered by both Public and Private Banks. This is available to all types of investor and for an amount as low as INR 1,000 to as high as INR 1 Crore. On the contrary, the interest rate 2 years back was as low as 6.75% to 7.5% for a deposit of 5 years and above. So, there is a huge gap in prevailing interest rate and the interest rate 2 years back. In fact, it’s an opportunity to not only make a fresh deposit but also to break the 2 year and 3 year old deposit (With a maturity of 5 years and above) and reinvest it into an FD with current rate of Interest rate for at least 2 years.
The first thing that an investor thinks is will it be feasible to break an FD? Will there be a huge difference in maturity amount? Well to call a spade a spade the answer is all Yes. Any investor who has a FD of 5 years and above and has left with atleast 700 days of maturity for them breaking FD is profitable. Its an opportunity to the investor. The current spread is more than 3% and the power of compounding is what makes the effective yield more than the yield the investor would have received.
When an Investor breaks the FD the Bank charges a penalty of 0.5% to 1.5% with rate of interest prevailing for the effective period at that point of time of investment i.e the Investor makes an FD at 7.5% for 7 years in 2010 and if the investor breaks it in 2012 then the FD rate will be charged of 2 Year period interest rate of 2010. Even with all this in mind, an investor will still benefit if he enters into an FD with leftover tenure of 2 years. With this it is advisable that the investor should add some zing to their Fixed investments. Moreover such high interest rate is difficult to get in future.
Now, this is not effective churning strategy if the FD is nearing maturity. In this case the investor might face interest erosion.
This is a guest post by Mr. Mitesh Agarwal, BBA & MBA (Finance). Currently working as Financial Analyst with a leading firm in Mumbai.