High interest yielding FDs luring investors? Experts suggest caution

Traditional investors are showing renewed interest in fixed deposits (FDs) due to rising interest rates that remained low till two years ago. Many depositors are thinking of closing existing deposits to reinvest that money in high interest yielding FDs. But look at the profit and loss forecast before moving for such a changeover, experts caution.

Hyderabad: Yet again, traditional investors have been showing renewed interest in fixed deposits (FDs). One of the reasons is that their interest rates that remained low till two years ago, have been rising steadily. As loans have been in high demand these days, various national and private banks have been hiking interest rates and making special offers to attract depositors.

Against this backdrop, the FDs are regaining trust of traditional investors to some extent. The changing scenario has drawn wider attention from investors, who have now been thinking of withdrawing low interest yielding FDs to use the money to open high interest yielding deposits. Let's find out what results such a changeover would give.

We have to take necessary caution before making investments in traditionally trustworthy deposits at a time when their interest rates are rising, as per experts. Instead of opening one single FD with all our available funds, we should split it into smaller amounts and invest in several types of deposits with varying terms. At least, three different FDs need to be opened - possibly one for six months, another for a year and one more for 18 to 24 months.

Short term FDs can be set for auto renewal. Once the interest rates go up, you can withdraw these deposits upon maturity and reinvest in FDs that yield higher interest rate. Considering rising inflation globally, interest rates may continue to go up for some more time. Still, there is no clarity on how long this trend will continue. So, it is better to invest in short term deposits.

Many depositors are thinking of closing their existing FDs to reinvest the amounts in higher interest yielding deposits. They are expecting higher income from this but any such changeover should be made only after examining several issues. They should know the pre-closure of FDs will incur fines and income tax. Also, interest based income will come down once an FD is withdrawn before its maturity.

Moreover, the banks will apply tax deducted at source (TDS) on interest income that was given till the time of pre-closure. Some banks impose penalties as well. When the amount of fines and tax deductions is higher, we derive no advantage out of new interest rates. As such, one should consider difference between old and new interest rate and get the profit and loss estimate before deciding on shifting to high interest deposits.