Bank fixed deposit (FD) or term deposit  is one of the most popular investment tools in India and is preferred by investors as it is considered to be safe, secure and earn guaranteed returns. 

 

Depending upon your need, one can choose FD with a tenure of seven days to as long as 10 years. Bank FDs can be easily liquidated whenever needed. However, a premature withdrawal usually attracts some penalty. 

 

For instance, State Bank of India (SBI) charges a penalty of 0.5% for retail term deposits of up to Rs5 lakh across tenures. However, there are ways to avoid penalty on premature withdrawal of fixed deposit. 

 

1. Bank FD Laddering: Laddering involves investing in multiple FDs maturing across different time periods. It is one of the best ways to manage liquidity. All one needs to do is to divide the lumpsum investment into smaller investments. Say, if you have Rs5 lakh to invest in fixed deposits, you can break it into five smaller FDs and invest across different maturities. 

 

This way you can have five FDs maturing after one year, two years, three years, four years and five years in a row. This way one can have sufficient liquidity, and if one needs money in the interim period, one can opt for pre-mature withdrawal only to the extent of the money required.

 

For instance if you require Rs3 lakh for a medical emergency and if you have a FD of Rs5 lakh, then you will have to break the FD and pay the penalty on the same. However, if you have invested the same money in five different FDs of Rs1 lakh each, you can opt to break only two FDs while the rest of the money will continue to fetch the same rate of interest at which you have booked the FD. You can also keep reinvesting your money and in this way, you will be able to have ample cash that will be maturing across tenures in different maturity periods. 

 

One can choose a ladder according to one’s requirement and convenience. It is not necessary to divide the entire amount into equal amounts. One can also compare the rates of interest of FDs offered by different banks at different tenures for laddering and get the benefit of insurance of Rs5 lakh on your FD. 

 

The smaller private banks and small finance banks are offering higher interest rates to garner newer deposits. The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), guarantees investments in fixed deposits of up to Rs5 lakh.

 

2. Loan Against FD: You can also take a loan as all banks allow investors to take a loan against their fixed deposits. The interest charged for a loan on a term deposit is generally 1-2% above the interest paid on the deposit. The interest rate, however, depends and varies from bank to bank. 

 

For a loan against fixed deposits, the SBI charges interest on a daily reducing balance, without any processing fee and pre-payment penalties. The bank offers loans at 1% above the relatively fixed deposit rate. SBI gives loan for up to 90% of the value of the fixed deposits with the bank.

 

3. Sweep-in Facility: The third method to avoid penalty on premature withdrawal of FDs is by using the sweep-in facility offered by your bank on savings account. Under this facility, you can allow your bank to transfer any amount that is more than the amount that is specified by you from the savings bank account to your sweep-in deposit. 

 

The name of this method may vary with banks. For example, the savings plus account of the SBI offers this facility only. While ICICI Bank provides this facility under the name of Flexi deposit, HDFC Bank calls it a sweep-in fixed deposit. 

 

The tenure of this FD may vary from 1 year to 5 years and the rate of interest will vary accordingly. But by and large, the amount transferred is likely to earn you a higher rate.

 

However, in order to make your savings bank account eligible for this deposit, you must open an FD account with at least Rs25,000. Apart from offering a better interest rate, the sweep-in facility forms a separate corpus that you can withdraw during emergencies, without touching your regular investments. There is no fees or penalties on withdrawal. Even if you withdraw from the deposit in case of any emergency, the balance amount will continue to earn interest at the same rate.

 

While investing in FD, you can use any of these three smart approaches to safeguard your money because emergencies come unannounced. 

 

Use either a sweep-in facility wherein you can link your savings account with an FD account or take a loan against FD  (up to 90% of your FD amount)  or use laddering to divide your FD amount into smaller  FDs so as to avoid paying a penalty on premature withdrawal of FDs.