Premature fixed deposit withdrawals: Here's what you may lose

With time it becomes critical for you to conserve money and expand it through wise investing. Fixed deposits are the most secure investment option. They provide you with a consistent and steady income from interest gains. That said, breaking your fixed deposits is not a financially good idea by most financial experts, as few consequences adhere to it.

Premature withdrawal means the action of withdrawing funds from a fixed deposit account before maturity. This is done if the investor requires money immediately. Additionally, an investor may withdraw funds from a fixed deposit before maturity if another investment choice is preferable.

Premature withdrawal

Penalty

The majority of banks levy a penalty for the early withdrawal of a fixed deposit. This is typically between 0.5 and 1.5% of the interest rate. However, some banks waive the penalty in the event of an emergency or if you choose to invest the same amount in another bank-provided investment choice.

Interest loss

Interest returns are what you receive from the bank on a periodic basis over the tenor period. By prematurely withdrawing your fixed deposit, you forfeit the interest profits that would have accrued had the tenor been completed, which could result in a financial loss for you.

For instance, consider an investor who has put a particular amount in a fixed-rate deposit earning 8% per year for three years.

If the investor withdraws prematurely after one year, the interest rate paid to the investor could be 6-7% per annum, not 8% per annum. As a result, unless essential, early withdrawal of a fixed deposit results in a significant loss for the investor.

Pause in investment growth

Over time, each fixed deposit compounds into a substantial sum. The longer the term of your fixed deposit, the more value is added. Once your initial investment increases in value, you can utilise it to fund vacations or for asset acquisitions. Withdrawing your deposit early, on the other hand, stifles its growth and returns merely the amount invested. You would forfeit the fixed deposit’s maturation earnings.

Uncertainty regarding finances

If you are retired and have invested in fixed deposits to earn larger returns, early withdrawal can create a great deal of worry. You would be deprived of a source of funding. This would result in concerns about paying bills and other growing costs. Rather than this, it is more prudent to take a loan on your FDs.

Lengthy process

As with other transactions, you are even breaking FDs entails certain formality. These procedures entail the completion of forms and the submission of a variety of documents. Only then will you receive a refund of your investment. Online facility, however, is much faster without the need of much paperwork.

Warnings if you want to break it to have it

-Do in-depth research on the terms and conditions related to your FDs.

-Look out for an alternative investment mode to finance instead of breaking your FDs.

-One can also consider taking a loan against the FDs.

-It is always advisable to have a financial backup in financial assets like mutual funds and shares to support your money need for emergencies.

Premature withdrawal from a fixed deposit might have several negative repercussions. Thus, you should evaluate these variables before finalising your decision to terminate your fixed deposits.