Should You Break Your Old FD for Higher Interest?

Should You Break Your Old Fixed Deposit for Higher Interest Rates?

Inflation is rising in India day by day and to control this inflation, government is rising the interest rates. So how rising interest rates help to control the inflation?

Well, its simple. Rising interest rates means the loans/debt will be costly. Thus, the cost of borrowing money will be more and that’s why investors/individuals/businesses will take less loan and thus less liquidity in the circulation and thus less inflation.

I personally advise investors to invest in debt mutual funds rather than Bank FDs. This is because in case of rising interest rates, your interest rates of Debt funds will be automatically adjusted to the new level but in case of your Bank FD, it will be same for the entire tenure of the Fixed Deposit.

Say for Example, if your Bank FD rate is 7% per annum for 3 years and after 1 year suppose if the bank rises the interest rates to 7.5% than you will still earn 7% per annum for the entire tenure of your fixed deposit.

However, what you can do is, you can break this FD and re-do FD with new interest rates. But well, here keep in mind that premature withdrawal of your FD will attract the penalty charges of around 0.5%. So if thee interest rates have gone 0.5% higher and the premature withdrawal charges are 0.5% than there is no sense of breaking this FD.

Another thing is that, there will be 2% penalty charge on breaking the FD on interest earnings. Means suppose if your interest rate is 7.5% and after 4 months suppose if you break the FD than you will get only 5.5% interest rate. This is 2% penalty. So just keep in mind these facts before breaking the Fixed Deposit.