One of the most commonly used investment instruments in India is the fixed deposits (FDs) because of their ease, low risk and guaranteed returns. Nevertheless, conventional fixed deposits will be a problem to investors who might be in need of liquidity before maturity. This is where some leeway of the withdrawal in some forms of fixed deposits would come in where there would be a balance between the fixed returns and access to money in the form of emergencies.

This paper will discuss the different forms of fixed deposits that are flexible withdrawal benefits. We shall also elaborate on what are flexible fixed deposits, their characteristics, and the difference between them and the traditional FDs. We shall also explore the relevant interest rates and computations to enable the investors to know their possible gains.

What is Fixed Deposit?

A fixed deposit (FD) refers to a bank and other financial institution product where an investor places some money and the bank earns them an interest at a specific rate over a set period of time. The interest rate is not very low as compared to savings accounts so it is a very appealing choice among those having low risk and stable investment opportunities.

The money in a fixed deposit is usually locked away until the completion of the fixed tenure after it has been invested. Nevertheless, premature withdrawals or loans to the FD amount will be granted in cases of emergencies. These withdrawals can be accompanied with penalty on the interest rate or cut down in returns.

Forms of Fixed Deposits which are flexible in withdrawal.

As the financial requirements are changing, banks and other financial institutions have come up with various types of fixed deposit schemes to ensure that the process of making investments is more flexible and accessible to customers. Among them, the following types of FDs ensure the needs of investors that demand certain liquidity:

Flexi Fixed Deposits

Description The FDs are a hybrid financial product which is a combination of savage or current account with a fixed deposit account. They can be subject to partial withdrawals as the remaining sum remains subject to interest with the constant deposit rate.

How It Works:

An investor binds his fixed deposit with a savings account.

In case more money is needed, it will automatically sweep the FD to the savings account without the need to disrupt the whole deposit.

The minimum withdrawal limits generally imposed by banks are either in multiples of Rs. 1,000 or Rs. 5,000 depending on the bank.

Interest Details: The balance amount will still have interest on the left amount at the original FD rate even after the withdrawal. These FDs are usually provided at a little lower interest rate compared to the normal fixed deposits.

Example Calculation

Assume a FD of 1, 00, 000 tenured over 3 years with 7% per annum interest. The end of 3 years maturity amount would be:

Maturity Amount:= Principal + (Principal x Rate x Time)/100.

 = Rs. 1,00,000 + (1,00,000 × 7 × 3) / 100

 = Rs. 1,21,000.

Under this, should say 20,000 be withdrawn half-way, the principal at the remaining tenure will be 80, 000 and interest will be recalculated on this account.

Withdrawal Facility Recurring Deposits.

Description: Recurring deposits (RDs) allow investors to invest little money at a regular time over a set time. Other banks have a flexible withdrawal facility on RD on short-term liquidity demands.

How It Works:

Depending on the terms and conditions of the providing bank, investors can draw a part of the deposited amount.

The interest on the amount withdrawn may be subject to a nominal penalty on premature withdrawal.

The remaining parts of the RD balance will keep on receiving an agreed rate of interest.

Sweep-in Deposit Accounts

Description Sweep-in deposits (also referred to as cash reserve account FDs) are new offerings that will be closely integrated with the savings account in providing liquidity when the need arises.

How It Works:

When the account balance in the savings account of a customer drops to a stipulated limit, the difference between the balance and the limit is swept in out of the corresponding fixed deposit.

Users are able to set up certain limits regarding the amount of withdrawal and frequency.

The balance of money in the FD keeps on accumulating interest according to the rate charged on that tenure.

Interest Impact: The amount withdrawn according to this type of FD only attracts the interests at the savings account rate and the rest of the non-withdrawn funds attracts the FD rate.

Short-Term Fixed Deposits

Description: Short-term FDs with a tenure of between 7 days to 12 months may be of great use to investors who might require their funds on a regular basis. These deposits might still face penalties on untimely withdrawal, but the loss of money is less as it does not last long.

How It Works: 

Deposit funds over a short period and have an option of prematurely withdrawing at a predetermined penalty on the interest accrued up to date.

Interest Rates: Typically, short term FDs have lower interest rates than the long term fixed deposits. For example:

With an interest rate of 5% and a face value of 50,000 of an FD, the duration of 180 days is assumed.

Interest earned = (50,000 × 5 × 180) ÷ (100 × 365) = Rs. 1,232.88.

The penalty can include breaking the deposit in 3 months and will lead to the loss of interest.

Post Office Fixed Deposits of Withdrawal Option.

Description: Indian post offices have fixed deposit plans which usually have flexible withdrawal plans. Among these is the Post Office Time Deposit (POTD) whereby accountants have the option of premature withdrawal in specific circumstances.

Penalty: The withdrawals are usually authorized after six months, yet in the event of withdrawal prior to a year, there would only be savings account interest rates. In case of withdrawal after one year but before maturity, the depositors will get an applicable interest with penalty.

Interest Rates Example:

1-year deposit: 6.9% per annum.

2-year deposit: 7% per annum.

A deposit of 6.9 per cent. on 50000 will give an interest in a single year of 3450.

Special benefit fixed deposits on senior citizens.

Description: Special fixed deposit schemes of the senior citizens are being provided by many banks and NBFCs (Non-Banking Financial Companies) with higher rates of interest and special privileges, such as easy facilities of withdrawal.

How It Works:

Senior citizen FDs usually permit premature disbursals with minimum or no charge.

Other banks will offer partial withdrawal services where only a part is withdrawn and the rest of the amount still remains and is subjected to the same rate of interest as it was initially borrowed.

Interest Rates: Depending on the bank; seniors are normally charged an interest rate that is 0.25-0.75 above the normal FD interest rates.

Advantages and Disadvantages of Flexible Withdrawal Fixed Deposits.

Benefits

• Access to the money when it is urgent without having to break the whole deposit.
• Carry forward interest on the balance deposit.
• Liquidity to take care of the short and long term financial needs.

Limitations

• Early withdrawal is usually penalized, and this could affect the overall returns.
• Flexible FDs are likely to be a little cheaper than standard fixed deposits.

Conclusion

The flexible withdrawal fixed deposits offer the convenience to the investors in case of unexpected emergencies where they need to access liquidity in an emergency. With some partial withdrawal, and related savings accounts, or even the possibility of making short-term investments, such fixed deposits are aimed at customers who still need to have more control over their money, but still enjoy the benefits of the fixed deposits. Yet, the requirements are to carefully evaluate any terms, fines, or interest discounts that are associated with these plans prior to selecting a flexible FD.

Summary: 

One of the safe types of investments in India is fixed deposits (FDs), as individuals can obtain a constant rate of returns through a set period. But conventional FDs have the drawback of tying up the capital, long before it can be accessed. Luckily, the fixed deposit schemes available in the market are flexible in terms of withdrawal as they provide in-part or in-premature withdrawal facilities at a minimal penalty. Fixed deposits that meet liquidity requirements include Flexi Fixed Deposits, Recurring Deposits with withdrawal option, Sweep-in Deposit Accounts, Short-term FDs, Post office Fixed Deposits and Senior Citizen FDs with special benefits.

Flexi Fixed Deposits and Sweep-in Deposit Accounts permit making partial withdrawals or, in fact, sweeping in money into a savings account to which the savings account is linked and the rest of the money would keep earning interest. In addition, short-term deposits are available to offer liquidity in the short term of one to three months, whereas post office and senior citizen FDs have more withdrawal terms with relatively high interests.

Although the flexibility of withdrawal can be convenient, it can be accompanied by fewer returns than the traditional type of FDs, or attract penalties in case of early withdrawal. Before choosing such kind of fixed deposits, investors need to critically compare the rates, terms and conditions of such deposits to make an informed choice.

Disclaimer: 

The article is purely informational as it is not financial guidance. The flexible withdrawal structure in the case of fixed deposits can be accompanied by certain terms and conditions, fines, and interest rates alterations. It is recommended that investors carefully consider the advantages and disadvantages of every available investment choice and seek out the advice of a financial advisor to help them with specific advice on which investment choice to make.