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HomeFinanceRisk Of Breaking Fd Before Maturity And How To Avoid It?

Risk Of Breaking Fd Before Maturity And How To Avoid It?

When you invest your hard-earned money in a fixed deposit or FD, you want it to appreciate to your desired level. However, at times, you may need the cash urgently for some emergency purpose. As a fixed deposit is a liquid financial instrument, you can break it prematurely anytime you wish to. But, there are a few risks of doing so. In this article, you will find every piece of information about the risks and how you can avoid them.

What are the Risks of Closing Your FD Account Prematurely?

The following are the risks of closing your FD account prematurely.

Mandatory Lock-In Period and Low FD Rates

Generally, an FD account comes with a mandatory lock-in period of three months. Hence, after depositing the money, you cannot withdraw the principal for three months.

When you withdraw the money after three months but before six months, the FD rates may be around 2% lower than the prevailing interest rates. And, when you apply for premature cancellation of an FD after six months, the FD rates are usually 1% lower than the tenure for which the FD account has run.

Penalty

While many reputed financial institutions like PNB Housing Finance may not charge a penalty, some institutions still charge a 1% to 2% penalty for closing the account prematurely.

A financial institution may also impose a penalty if you have opened an FD account through an authorised agent. As they pay the brokerage commission in full during account opening, they may deduct the brokerage money from your deposit amount.

Hence, by breaking the FD early, you get lowest FD rates and might have to shell out some amount as a penalty.

Besides penalty and a reduction in FD rates, the premature closure of an FD account may also create a roadblock in the path of financial freedom. While putting in the money, you may have set some goals for yourself or your family. Closing the account prematurely may also mean sacrificing your dreams.

How to Avoid the Premature Closure of FD Account

Here are the things you can do to avoid premature closure of your FD account.

Use the FD Ladder Technique

The FD ladder technique is the simplest way to avert premature closure of the FD account. Usually, people invest a lump sum in a fixed deposit. Hence, when they decide to close the account prematurely, the financial institution levies a penalty on the entire amount.

To avoid paying more as a penalty, you may divide the lump sum amount into five or six portions and choose different tenures for each portion. For example, if you want to invest INR 10 lakh, create five FD accounts of INR 2 lakh each and choose tenures ranging from one year to ten years. Hence, you can get not only the best FD rates but also ample liquidity to fulfil family obligations.

Invest in Non-Cumulative FD Account

Another excellent way to avoid the premature closure of an FD account is by choosing the non-cumulative option. When you invest in a corporate FD, the rates of interest are much higher than banks. Hence, you can get interest every month. If you can manage to save a percentage of the interest income every month, it can add up to a sizable amount.

Conclusion

 

Opening an FD account is a wonderful way to utilise your idle capital and earn money. However, as a prudent investor, you must keep aside some funds in the savings account, which may come to your rescue during times of need.

dikshasharma
dikshasharmahttps://www.ecogreenpark.co.id
I am a professional blogger | SEO Expert | And Developer
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