How can we decide the best size and lock-in Period for Your Fixed Deposit


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Fixed deposits or term deposits help you make the most of your investment. Your deposits are locked in for a fixed period at a fixed interest rate, backed by contractual guarantees. The interest rates are up to 8.5%, and immune to market fluctuations. That translates into the security of the principal and decent interest earnings – the two critical yet opposing requirements of a successful investment. The tenor could be anywhere between 7 days and 10 years, and the lower limit could be INR 1000, both depending on the issuer. The upper limit doesn’t exist.


Note that, the interest payout type, tenor and size of the deposit determine your profits in a fixed deposit. Your interest payout options include cumulative and non-cumulative. Cumulative option guarantees interest payouts upon tenor expiry. On the other hand, the non-cumulative option allows you to enjoy interest payouts periodically, on a monthly, quarterly, half-yearly and yearly basis. Banks tend to offer up to a 1% higher rate of interest on cumulative FDs. It, therefore, makes sense to go for cumulative FDs, unless you need regular interest income.


Well, for deciding the right tenors and investment size, you need a more holistic approach.


Size of Deposit:

The interest rates vary as per the size of the fixed deposit. You could lose significant interest earnings on inappropriate deposit size, especially if a hefty sum is involved. Say, an FD investment worth 5 Crores will attract a higher interest rate compared to the one over 5 Crores. The thumb rule here is to split your investment across 4 to 5 smaller FDs.

When you split your FDs, you bring in safety and better liquidity. The Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees your term deposits, paying you INR 1 lakh for each FD in an event of a bank default. With multiple FDs, you earn higher compensation.


In case you need funds midway the tenor, you can break one of the FDs. This way, your losses will be low and the rest of the FDs will continue to create wealth. Plus, ALM policies mandate penalties on premature closure of the term deposit. So, smaller FDs attract lesser penalties.


Period of Deposit:

The importance of the term period in maximizing your ROI cannot be overemphasized. The term deposit attracts compound interest, which grows exponentially with time. The more time you stay invested, the higher will be the effect of compounding on your FD earning. Simply put, lengthier tenors, say, 3 years or above, will fetch you the highest FD rates.


Let’s understand the FD Calculation formula:

A = P (1 + r/4/100) ^ (4*n) and A = P (1 + r/25)4n

Here, A stands for proceeds, P represents principal, R denotes interest rate and n is the tenor.

In the first year, only the principal attracts interest. But in the subsequent years, both, the principal and interest, earn interest. That means term deposit ensure better yield in the longer tenors.


Note that, when deciding the FD tenor, your investment objectives have a key role to play. For instance, you’ll need funds for your marriage, say, in 3 years. So, keeping the FD lock-in period to 3 years makes sense. Remember, premature withdrawals incur heavy penalties.

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