Breaking the Old Fixed Deposits

Bank fixed deposit rates have really gone up over the last 9 months. It has moved northwards by at least a 2% for a 2 year FD.

Interest rates are still on the rise and with inflation not coming under control, it is expected that the RBI will continue to focus on increasing its rates in the coming policy reviews.

This will have an negative impact on the growth in the Indian Economy.

While that is what the future will hold, a lot of us would have invested in fixed deposits with banks because of guaranteed returns as well safety of deposits. However those would have been at much lower rates than what is the prevailing today.

So when does it make sense to break open the old deposits and invest in the new ones?

There are some costs that you incur when you break your fixed deposit as under which you need to take into consideration.

1. The tenure which you had initially put in your money for is no longer valid. You will earn the interest on the tenure in which you are breaking up your deposit ( In an increasing interest rate scenario, this may actually turn out to be positive)
2. One may need to be a penalty of 1-2% on the interest earned since the bank is losing a fixed guaranteed deposit in its kitty.

So when does it make sense for you to break your deposits?

1. Evaluate the costs with the increased rates over the ENTIRE period of the deposit.
2. Usually breaking a new deposit when the tenure is quite long- say 2-5 yr may actually make more sense.

Go ahead, reevaluate your portfolio of fixed deposits and fix in the higher returns!! Every % increase makes a big difference!

Happy investing..

( Use the links on the right to subscribe to the posts or become a follower)