Fixed deposits with floating interest rates: All you need to know

By definition, in a fixed deposit, both the tenure of investment and the interest rate are fixed. But a few private and public sector banks are offering special FDs that carry floating interest rates. These are called Floating rate FDs. These special FDs can be more attractive than normal ones. Money9 gives you a brief guide.

Floating rate FDs are a form of fixed deposit in which the FD interest rate is not fixed for the entire term of the deposit but shifts in lockstep with a reference rate that is reset on a regular basis by the bank.

If the rates are rising, floating FDs are structured to benefit from interest rate fluctuations without having to close and book a new fixed deposit again.

In floating FDs, the tenure and the investment amount are fixed, but the interest rate varies from time to time. The interest rate on such a deposit is linked to the benchmark rate and the interest rate moves in tandem with movements in the benchmark rate.

Benefits 

There are a few benefits of investing in a floating rate fixed deposit scheme. First, if the interest rate is revised higher the customer can benefit from it. Rates might be revised every quarter by banks.

Interest is paid on floating FDs on quarterly basis on the last day of the month. Besides, an overdraft facility is there up to 90% of the deposit amount within a day.

Nomination facility and facility for senior citizen’s higher interest rate up to 50 basis points is also there in this special FD schemes. Premature withdrawal facility without any penalty is also offered by some banks subject to some stipulated rules.

What are banks offering?

Some public and private sector banks are offering this special flexible rate FDs. Among PSBs SBI, Bank of Baroda, Union Bank, Bank of India, IDBI Bank, Indian Overseas Bank and Indian Bank are offering this FD.

Among private sector banks ICICI Bank, Axis Bank and Bandhan Bank are offering these.

Advantages over normal FD

In a normal fixed deposit, individuals generally deposit a certain sum of money for a particular period of time, with this amount earning fixed interest. Withdrawing this amount before maturity is generally not permitted.

In floating rate fixed deposits account holders can withdraw certain sums of money without penalty. Additionally, the interest rate varies during the tenure multiple times as set by the bank.

Expert view

“Floating fixed deposit is good if the interest rate hovering too frequently across a specific time period. But in static interest regime like we are going through currently there is no gain to invest in this floating rate fixed deposit,” said Nilanjan Dey, director, Wishlist Capital Advisors Pvt Ltd.

But he said that if any person wants to invest between one and three years, normal FD or investment in debt fund is more advantageous. If one wants to invest for more than three years then this floating FD might be considered, added Dey.

Tax applicability is the same as in normal FDs. “Currently the trend in India is negative as interest on deposits is concerned. So, if you are willing to take a calculated risk, you might park your money into floating rate FDs. Otherwise normal FDs are better for long term investment,” said Saibal Biswas, a personal finance expert.