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The Reserve Bank of India (RBI), in its latest monetary policy review, has slashed the repo rate by 25 basis points, lowering it from 6.50 to 6.25. While this is likely to impact borrowers positively, it has brought fixed deposits into the spotlight. Here’s why – when RBI conducts open market liquidity operations and cuts the repo rate, it’s a sign that FD rates have likely hit their peak for this cycle and may start declining. So, those who have locked their FDs at higher rates will continue to enjoy high rates but those starting new FDs may have to settle for a lower rate.
Now, FDs come in many types, providing investors with a gamut of options to choose from. Two specific types that we are discussing here are callable and non-callable FDs. Callable FDs allow you to withdraw your deposit prematurely, but at a penalty which varies from bank to bank. Non-callable FDs, on the other hand, lock in your money until maturity and do not allow early withdrawals. Let’s find out more about each of these FDs to help you decide which is suited for you.
A callable fixed deposit is a type of FD that gives the option of making premature withdrawals and is often used as a savings plan. For instance, if you have invested in a callable FD but need funds 6 months into your investment, you can withdraw a part or the entire amount of your deposit at a penalty.
Starting with the benefits, callable FDs usually don’t have a fixed lock-in period. However, banks may charge a penalty if you withdraw your money before the agreed term. Secondly, the minimum deposit amount for these FDs is typically lower than non-callable FDs.
Coming to the flaws of callable FDs, they charge a penalty for premature withdrawals which can eat into your final returns. Also, the return rates for callable FDs are comparatively lower than those of non-callable fixed deposits.
Non-callable deposits do not offer the flexibility of early withdrawal. This means, once you invest in such a deposit, your funds remain locked-in until maturity, except in specific cases like bankruptcy, business closure, or the account holder’s demise. These deposits also usually require a higher minimum investment compared to callable deposits. Non-callable FDs offer higher interest rates compared to callable deposits but lack the liquidity offered by the latter. As a result, accessing funds during a financial emergency may not be possible if you have a non-callable deposit.
Non-callable FDs offer a higher rate of interest on the principal deposit amount, compared to callable deposits. Since premature withdrawals aren’t allowed, they provide banks with steadier funding and support strong asset-liability management.
On the flipside, non-callable deposits, with their lock-in period and no early withdrawals, lack the liquidity offered by callable deposits. Withdrawals are only allowed in rare or extreme situations, while funds once invested are locked for the term of the deposit. For instance, if you invest in a five-year non-callable FD, but find a better investment opportunity after the first year of your deposit, you cannot withdraw or move your money to earn higher returns. Also, the higher minimum deposit requirement limits the accessibility of such this option to only those who can afford a significant lump sum investment.
The choice between callable and non-callable fixed deposits depends on your financial needs and investment goals. If you prioritise flexibility and stable returns, callable deposits are a better option, allowing for early withdrawals and greater access to funds before maturity. However, banks may charge a penalty for premature withdrawal, and the interest rates offered by these deposits are generally lower compared to non-callable deposits.
On the other hand, if you prioritise returns and can invest a higher amount, then non-callable deposits could be more suitable. Do note that these deposits require a relatively higher minimum investment which typically goes up to Rs.15,00,001. Before choosing this deposit, assess if locking in a large sum of money does not disrupt your financial goals. Due to the strict lock-in period, banks are assured of the availability of funds and hence, can offer a higher rate of return on them. However, this also restricts your access to funds, except in rare cases like death or bankruptcy. So, if you anticipate a contingency or are faced with an emergency, these deposits may not be recommended.
Finally, assess your financial situation and review your goals to decide if this investment is a good fit and can help you achieve your aspirations.
(Adhil Shetty is the CEO of BankBazaar.com)
