A Fixed Deposit (FD) is one of the most popular investment avenues today. Consumers consider it to be a low-risk, secure instrument that delivers guaranteed returns. Despite these advantages, some account holders make premature withdrawals due to an urgent need for funds. Premature withdrawals come with both advantages and disadvantages. It is important to consider both and decide the right course of action. We also share alternative ways to raise funds without interrupting your Fixed Deposit.
FD premature withdrawals
Your Fixed Deposit comes with a specified maturity date. The tenure may range between seven days and 10 years. However, at times an account holder may not be able to wait until the maturity date. An urgent need for funds may arise and they may decide to withdraw funds before the maturity date.
This action is known as a premature withdrawal. Account holders can withdraw partially, or they may decide to withdraw the entire amount and shut the deposit altogether. This action comes with pros and cons.
Also Read: Reasons Why Fixed Deposits Are Favored by the Indian Middle Class
Pros of premature withdrawals
Below, you will find a comprehensive list that highlights the numerous benefits associated with making premature withdrawals from a financial account or investment:
- During an emergency, your Fixed Deposit gives you instant access to funds to meet your needs. The amount you withdraw will be transferred to your Savings Account. This is a useful facility during times such as hospitalization, or job loss.
- You can withdraw either a part or the full by closing the account to take advantage of any other lucrative investment opportunity.
- A premature Fixed Deposit withdrawal can be used to pay off any outstanding debt, thus enabling you to cut down on interest expenses.
Cons of premature withdrawals
However, it is not always a bed of roses when you withdraw your funds prematurely. It has its negatives such as:
- A key disadvantage is the reduction in the interest earnings potential. This is because the overall value of the deposit has been reduced. You lose out on the advantage of the optimal compounding effect.
- Premature withdrawal may come with certain penalties or charges. These fees increase the overall cost of the Fixed Deposit. When opening your Fixed Deposit, make sure you understand all the terms and conditions for premature withdrawals.
- Fixed Deposits play an important role in the overall performance of one’s portfolio. However, premature withdrawals disrupt the performance of this asset, hence, slowing down the achievement of your financial goals.
Also Read: What is Fixed Deposit (FD) ? Advantages of a Fixed Deposit Account
Alternatives to premature withdrawal
Now that we have gone through the pros and cons of prematurely withdrawing from an FD, here is a list of alternatives to premature withdrawals:
Take advantage of the overdraft facility
Banks offer an overdraft facility, which entitles you to up to 90% of the value of your Fixed Deposit. The interest on overdrafts is around 1-2% higher as compared to the interest rate earned on your Fixed Deposit.
Build an emergency fund
Account holders often break Fixed Deposits to fund emergencies. An alternative to this approach is to build a separate emergency fund. This is an accumulation of funds for six to 12 months of living expenses. They can be stored in an easy-to-access liquid fund.
Open a Recurring Deposit
Say, you have any specific lump sum expenses coming up such as tuition fees, purchasing an expensive product or paying for medical insurance. Consider opening a Recurring Deposit in the run-up to these purchases. Put away small amounts each month, instead of attempting to make a lump sum payment.
Also Read: Know the different types of Fixed Deposits
Plan your Fixed Deposit
Effectively plan your investments using a Fixed Deposit Calculator, a free-to-use financial planning tool. You can input four key variables to arrive at the right terms and conditions. These include the principal amount, the Fixed Deposit interest rate, the interest payout frequency, and tenure.
The takeaway
Open a Fixed Deposit with Axis Bank, and enjoy the benefits such as flexible tenures, competitive FD interest rates and a flexible interest payout frequency that serves your needs and financial goals. Choose from flexible maturity periods from seven days to 10 years. Open your deposit with ease via the internet and mobile banking. You can start with ₹5,000 via online banking, and ₹10,000 via branch. Last but not least, premature withdrawals are possible seamlessly, for any emergency circumstances.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
