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Encash your old FDs and reinvest
Bridget S. Leena and Dhvani Desai, Outlook Money | March 20, 2007
If you had invested in a five-year bank fixed deposit two years back, you will not be a happy man today. In the period since, banks have repeatedly hiked the interest rates for their FDs with a one percentage point hike in the last one-month or so.
Then there are new products such as SBI Platinum Account offering 9 per cent returns for a three-year tenure.
The minimum investment required is Rs 100,000 and the offer will be open till 31 March 2007. A unique feature of this FD is the 'put option' introduced for the first time in India. A put option gives the investors windows of time before the end of the tenure to exit.
In this case, the investor can exit after one year and two years getting annual interest rates of 8.25 per cent and 8.50 per cent respectively. Just in case you are turning green with envy at people investing in higher paying FDs, there is hope.
It pays to make a break. Despite penal rates for premature encashment of lower earning fixed deposits, it makes sense to encash them and move on to higher paying fixed deposits. This can be exhibited through a numerical illustration (see Time to Break Your Fixed Deposit).
Let's assume that in 2005, you had invested in a five-year FD of any major bank that provided 5.6-5.75 per cent per annum. If you encash it today, you lose on an average, 0.5 per cent interest due to premature encashment. If you invest the proceeds in a three-year SBI FD, which provides 8.25 per cent per annum, you would earn much more than staying invested in the old FD.
Look before you leap. The rising FD rates come into perspective only when you take tax and inflation into account. Post-tax returns of all fixed income options except public provident fund, a 15-year option, and fixed maturity plans of mutual funds (which at the moment don't have tenures beyond 15 months) are providing sub-six per cent returns which don't beat inflation. So, before you invest or re-invest in a high-interest FD, you will do well to ask whether such an investment will really be worth the while.With inputs from Sunil Dhawan, Outlook Money