Fixed deposits (FDs) have always been a popular investment avenue for Indian investors looking for safe and guaranteed returns. And now, with interest rates on the rise, FDs seem even more lucrative. While the direct benefit of earning higher interest income is apparent, there are also some hidden ways to maximize your gains from rising FD rates.
Here are these ways to benefit from rising interest rates:
1. Choose Short-Term FDs
Typically, longer-duration FD interest rates are higher. However, parking your money in short-term FDs is advisable with rates expected to rise further. You can then renew your FDs at the higher prevailing rates later. This will allow you to take advantage of the upward momentum in interest rates. The table below shows a comparison:
FD Tenure Current Rates Expected Rates after 6 Months
1 year 6.5% 7%
2 years 6.75% 7.5%
3 years 7% 8%
As seen above, 1-year FDs can be renewed at a higher rate (7%) after six months, earning more interest overall.
2. Prepay Your Loans
Most loans and debts like home loans, car loans, credit card dues, etc., carry high interest rates of 10-14%. Now could be a good time to foreclose or prepay them as rising FD rates make it more affordable to allocate funds for repayment. This will minimize the need to pay higher interest on your loans.
Moreover, you can then divert surplus funds to FDs to take advantage of better returns. When deciding on this, compare your loan interest rate with expected FD returns.
3. Withdraw to Reinvest
If you have existing long-term FDs at lower rates, consider withdrawing them now to reinvest the proceeds in new FDs at higher interest rates. Although premature withdrawal would attract a nominal penalty, this could be easily recovered over the tenure through higher returns.
However, compare applicable penalties, new expected rates, and other factors holistically before deciding. While online comparison tools, like the Fixed Deposit calculator, can be useful for calculating estimated returns, log on to bank apps for updated rates and special offers.
4. Explore Sweep-in FD Options
Some banks offer sweep-in FDs that allow links to your savings accounts. If the account balance exceeds a threshold amount, the excess gets auto-transferred into an FD to earn higher interest.
Most banks set this threshold at Rs. 25,000-1 lakh. Keeping surplus cash in savings accounts makes less sense as FD rates increase. Opting for a sweep-in FD ensures your money is put to best use.
Opportunities for Negotiating Higher Rates
Here are some tips for negotiating higher FD rates in points form:
1. Shop Around:
Don’t just automatically renew your existing FD. Shop around at various banks and NBFCs to find the best interest rate. Interest rates vary from bank to bank.
2. Time Your FD:
Banks often offer special higher rates for specific fixed deposit tenures. Opting for those tenures can help you earn more interest.
3. Ask For A Rate Match:
If you find a competitor offering a higher rate, ask your bank to match that rate. Most banks will increase rates slightly to retain customers.
4. Deposit A Larger Amount:
Banks tend to offer higher interest rates to customers who invest larger FD amounts. Negotiate to get the benefits of the higher slab.
5. Enquire About Special Schemes:
Many banks run special FD schemes for senior citizens, women, rural customers, etc., offering enhanced interest rates. Check if you qualify for these.
6. Build A Relationship:
Customers with long-term relationships and multiple accounts/services often get preferential rates. Consolidate your accounts to strengthen your position.
7. Time Your Renewal:
Interest rate offers fluctuate all through the year. Renewing FDs when banks have surplus liquidity can result in better rates.
The Bottom Line
Rising inflation and consecutive rate hikes have created a suitable environment for FD investors. Follow the tips above to make the most out of it directly and indirectly. Keep abreast of the latest FD rates offered and plan your investments wisely.
