2012 – Aryan has a bulk amount to invest, he decides to invest in a FD as he sees it as the safest form of investment.
2014 – Two years after Aryan has invested in an FD; he comes to know that he will soon be a dad. After hearing such a life changing news, Aryan is not just happy but concerned as well. He knows that he does not have sufficient savings and he has to break his fixed deposit. Now that he has to break his FD, he would no longer get higher returns.
Facing similar problems? Falling short of funds? Stuck in between the decision of whether to break an FD or not?
Well, here is the solution to your problem. It comes in the form of linked fixed deposits. A variant of fixed deposit which has been designed to cater to the needs of the investor.
What is a Linked Fixed Deposit?
A linked fixed deposit is a combination of your savings account to your fixed deposit account. Under this scenario, both the mediums are linked.
How does a linked fixed deposit work?
A linked fixed deposit has an auto sweep-in and sweep-out facility. Under this, if the amount reaches a pre-set threshold, it will automatically convert into fixed deposit.
For example, if you have an amount of INR 1 lakh in your savings account, it would accumulate a rate of interest between 3-4%. Here, it can be accessed as and when you want. However, when you invest in a fixed deposit, you might earn an interest rate between 7-8%, but your investment is locked. Thus, here you cannot access it before its maturity. A linked fixed deposit, however, is the solution to this liquidity issue in fixed deposit and low rate of interest in a savings account.
Benefits of linked fixed deposit:
Interest benefit – The major benefit here is that regardless of the term of your Fixed Deposit, the interest rate provided on your FD would be prevalent to the market rate when you opt for the auto sweep. This has a positive impact on your interest rate.
Meeting shortfall – When you are in dire need of money, and the funds in your savings account are not enough. In such a case, a part of your FD can be used to meet the shortfall. The major benefit here is that you get the amount that you want. On the top of it, your rate of interest does not get affected, and you continue to avail higher rate of interest on FD investment.
Higher interest – Savings account often come with a lower interest rate as compared to fixed deposit. However, when both of these instruments are combined, you are entitled to receive a much higher rate of interest.
Liquidity – The major reason why most people opt for this is that of liquidity. Unlike fixed deposit where if you choose to liquidate, your rate of interest will get affected. Under linked fixed deposit, you can borrow the amount and still get a higher rate of interest.
The majority of the lenders will provide you with this linkage service for free. However, there are some who might charge you a small fee for this process. Though, one of the most notable points here is that the maximum amount to be retained in the savings account along with the swipe out amounts are determined by the financial institution and not the investor.
However, there are scenarios where the lender does not match investors’ expectations. In such a case, an investor has to look for other investment avenues.