Renewals and Withdrawals of Fixed Deposits

Fixed deposits are quite popular with customers in India. These deposits are the primary choices for customers owing to the assured returns as well as ease in opening and renewing the FDs. FDs also offer substantially higher interest rates when compared to savings accounts.

Fixed deposits provide higher returns as the tenure increases. Investors are realising the importance of staying invested in long term products, as the compounded interest rates can truly be harnessed after a substantial amount of time has passed with the product. This line of thinking has ensured that investors opt for auto-renewal of their fixed deposits without looking around to check if they can get better rates once their initial investment matures.

On maturity, an FD can be directed toward renewal or withdrawal. The renewal clause is available as an auto-renewal feature, wherein the bank or financial institution will automatically renew your deposit for the same period of time and at the same interest rate on maturity. This is a good option if you have invested funds without any foreseen need for them. However, with this ‘Buy and Forget’ mentality, you might sometimes lose on better deals which you could have found even on a cursory look at available options.

Let’s say you invested Rs.5 lacs in a 5 year FD with interest rate of 10%. At the end of 5 years, the fixed deposit rates have fallen to 8%, a significant decrease over the said period. In case you had opted for auto-renewal, you would have been automatically enrolled in the same FD for another 5 years and at the same rate of 10% regardless of market rates. If you had opted for withdrawal, a new FD will offer you 8% rate of interest on the deposit.

The auto-termination option is also available which shuts down the FD on maturity and transfers the funds to a preselected savings account. Once again, the auto-termination option might result in lower interest rates on your reinvestment owing to market changes during the tenure of the original FD. Therefore, you have to take an informed decision while renewing your FD so as to get the highest benefits.

Suppose you have bought an FD of Rs.5 lacs for a tenure of 5 years and forgot about the maturity date. At the 6th year when you do realize that you had invested in an FD, you go back to the bank and ask for withdrawal of funds. The bank obliges, but you end up losing interest for the excess 1 year of deposit due to preclosure of the account. If you had opted for auto-termination, you would have received the amount in a bank account and taken decisions to grow it or let it idly earn savings interest.

As illustrated in the above sections, the choice for renewal or withdrawal should be made after getting a feel of the current market scenario as well as future expectations from the market. Renewal loses out to withdrawal when the economy of the country is on an upward swing, which usually implies lower lending rates and higher borrowing rates. Also, you can go for auto-termination if you have a defined path forward for your investment once the FD matures.

However, renewal is still a good option if you don’t plan on keeping tabs on your investment for longer durations than the maturity period of the FD. Renewal offers a peace of mind to the investor so that they can sit back and let the investment grow to exponential levels. Also, an up-swinging economy will lower interest rates going forward, which makes auto renewal a great option in the future.