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  • Category: Banking

    FDs for 1 year and then renewing it each year or putting it for 5 yrs at one go beneficial?


    Planning to invest in fixed deposits? Confused if it is better to invest for full period or renew it yearly? No worries , our ISC experts shall provide you inputs to decide which option is better so that you can make a good choice.

    I have this question in mind for long. I normally put Fixed Deposits with SBI bank for a period of one year and on maturity, I will renew it for another year again. As I think that is profitable and also my funds won't get locked up for a huge period of time. If I wish not to renew it after a year then I can stop it as well.

    However, few of my friends have told me I will be paid more interest if I put the funds for 5 years or three years at one go rather than keep on renewing it every year for 3 or 5 years. Is that true? However, when I check the interest rate online it is high for a 1 year then for 5 years.
    Please, can you explain to me which is a better option and how it works?
  • Answers

    5 Answers found.
  • This is a query I am getting from many young people who want to invest for good returns. Even the elders are equally baffled with the interest regimes in the banks and they also have his doubt in their mind as what is the best time period to invest.

    Today because of Govt policies, RBI guidelines and financial policies the bank interest rates are on a slightly decreasing path. What does it mean? The interest rates might go still downward in the future. So that is one prime consideration for us. The next important thing is that if you minutely observe the bank FD interest rates today you will see that they are at peak something like 7-8% per annum if you go for the FD for a period of 2-3 years. On the other hand, If you go for less duration than that the interest rate will be less and surprisingly when you go for more than 2-3 years duration, again interest rates are decreasing. It means that banks are basically discouraging the investors for going for a longer time FDs. Why banks are doing it is because they have an apprehension that if the interest rates further go down then they will be unnecessarily paying more to those investors who are going for a longer duration FDs.

    These are the basic premises on which we have to take our decision for FD. Today the interest rates are quite low but if the economy looks up and India progresses then there is all possibility that they might go down further. Those investor who believe in this can go for a long term FD as bank will have to pay them todays agreed rates till that time (even the rates fall in future). FD is a contract between the investor and the bank to pay the agreed interest for the agreed period. Others can go for 2-3 years where one is getting maximum rate and after completion of that 2-3 years, again assess the situation and renew the FD at the rates prevailing at that time.

    To make things more clear let me give one example - In the years 1982 to 1986 (approximately) the bank FD rates were 4-5% for 1-2 year duration, 6-7% for 2-3 year duration, 8-9% for 4-7 year duration and 10-14% for 8-10 years duration and more than 10 years duration was not allowed for FD. At that time many seniors went for 10 years and though interest rates fell subsequently they got 10% up to 10 years.

    Suppose due to some unforeseen reasons or circumstances the interest rates start going fast upward then what to do. The simple answer is cash your FD prematurely and go for a new FD on more interest. People do it often and it is a very common thing for those who know these things. There might be a small penalty on the prematurely withdrawn FD but it is insignificant.

    Knowledge is power.

  • Your assumption that you will be benifited significantly if the money is being put for a longer duration because of benifit of compound interest. Of course such a maturity could be attractive because of calculation of the interest component in the compound manner. However in case rate of interst for the consecutive three years is around 7 percent per year, the yield obtained for the lock up period for 6.5 percent for three years, would not fetch that much amount.
    It clearly states that the Banking - officials are discouraging Fixed - deposit for the higher duration since they may not exploit the market rate of low interst regime.
    However, the payment of maturity could be higher in the longer term if the rate of interst is kept at the same rate for a year or rate being enhanced per year in the longer horizon.
    However, watching the market sentiments in relation to Fixed - deposits of the Banks, rates are not to pick up, rather it will go downward and hence a deposit for the period of three years would be much better than duration for one year. This is true for the Senior - citizens especially because of additional benifits of 0.5 percent and also yield be somewhat higher at the rate of 7 percent for three due to receipt of interest rate as a result of compound interest.

  • I think you got the answer to your question from the above post. Banks gives high interest on 1-3 year duration FD while for long duration FD interest rates are slightly lower. Current rates of interest on FD are 6.5% for 1-2 year FD and for FD more than 2 year onwards rate of interest is 6.25%. As FD rates of interest are being deceased day by day. More rates of Interest will be paid by banks to a long term FD. So usually banks do not promote customers for long term FD.
    Here I am giving example of my FD. I had open a FD account in SBI in Feb 2013 for 5 years. Rate of interest was 8.5% at that time. It get matured in Feb 2018. While rate of interest was reduced on FDs during September 2014 to 7.25%. However, I received an interest of 8.5% for 5 years. in Feb 2018 after maturation my FD was automatically renewed at the rate of interest of 6.5%.
    So long term FD are always gives more benefits instead of short term FDs. But If you know that you will be requiring an amount after a certain period of time. you can open short term FD account to avoid penalty.

  • I am giving below the present interest rates that are being offered by the State Bank of India.

    46 days to 179 days 5.5%
    180 days to 210 days 5.8%
    211 days to less than one year 5.8%
    1 year to less than 2 years 6.4%
    2 years to less than 5 years 6.25%.

    From the above, it is very clear to fix the amount for one year and then get it renewed after that period for another one year, renewing every one year as long as you want is the best option to get you maximum returns. All the banks will follow the same pattern as mentioned above.

    drrao
    always confident

  • Investment your surplus money for safe investment FD is a good choice. Questions come in our mind for how long and what tenure of FD should we choose. Here are the below points described how to find a solution while investing money into a Fixed deposit.

    One: Whether you can predict the near term interest rate trajectory rightly. In the current scenario, inflation is low and the demand is not picking up, so the trajectory is in the downside, the interest rate is going down in the near term. So it will be worth if you invest in the longer-term.

    Two: If Global crude oil prices will shoot up, it will have an impact on inflation and the central bank will have to raise the interest rate, in the near term there is no sign of raising the interest rate by RBI.

    Three: WPI inflation, as well as retail inflation, is low. This is the right time to cut the interest rate for banks.

    Four: Domestic demand is picking up and due short of liquidity interest rate may go up in the near term.

    These are the possibilities and you have to find the best solution for your investment based on these situations.


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