Many individuals place large sums of money into bank deposits. But, before placing a big lump sum in a single fixed deposit, one should be aware of the hazards of placing money in a single deposit.
One of the biggest problems is that you cannot partially break or withdraw a bank fixed deposit. Let us now cite this with an example.
Consequence of breaking the entire fixed deposit
Now, if you break your entire fixed deposit, there could be a penalty that is applicable. Moreover, if bank interest rates have fallen you would be a loser, because you would have to replace the money that maybe excess at lower interest rates.
Also read how to save TDS on fixed deposits
In the above example, if you break Rs 10 lakhs and would need only Rs 4 lakhs, then you may have to invest the remaining Rs 6 lakh at a lower interest rates. Apart from the penalty the interest rate would be for the period so deposited.
The ideal way to place fixed deposits
When an individual is opening fixed deposits, the ideal way would be to place the bank fixed deposits in multiple of smaller amounts. So, if you want to place affixed deposit of Rs 10 lakhs, you can place them in 10 deposits of Rs 1 lakh each, so you do not have to partially break the deposit in times of an emergency.
The other way would be to take a loan against your fixed deposit, if you have placed fixed deposits at a high rate of interest and you do not want to break the same. Bank generally charge interest of 1 per cent over and above the fixed deposit interest rate for loans against bank fixed deposits.
There are many savings bank accounts these days that work as flexi deposits. You can check with your bankers for additional details on the same.
As mentioned in the article, it is best to place money in smaller amounts instead of one large amount. Alternatively, you can set aside an amount for emergency in a contingency fund. Remember, that there is no big incentive that one gets for placing a single fixed deposit.