3 smart ways to avoid penalty on premature withdrawal of FD

Investing in fixed deposits is a common practice in India to earn interest on savings. Almost everyone prefers to put their money in fixed deposits due to their secured nature of investing and some of the best FD rates. Further, it also comes with a wide range of tenures, ranging from 7 days to 10 years.

 
Sometimes, you might want to withdraw the money or close the fixed deposit account before its maturity because of a sudden financial crunch. These premature withdrawals come with a penalty. Plus, the interest rate is also applicable for the period held and not the original tenure. 
 
Before applying for FD many experts suggest avoiding these situations with the help of the following three ways.
 

1. Laddering approach

This is a commonly used method to avoid penalty on premature withdrawals of FD. This means to spread investment across various financial products with different maturity periods. It not only helps in managing interest rate risk but also provides liquidity to funds.
 

2. Sweep-in-accounts

Also known as a 2-in-1 account, it is a preferred choice if your primary concern is liquidity. In this case, the amount above a specific threshold limit in the savings account is converted into FD. Further, you are not charged for utilizing the funds as and when required.
 

3. Availing a loan against FD

You can take a loan against your FDs. The interest rate on such loans is usually 1-2 percent above the interest paid on deposits, but it depends on the lender. Further, they come with interest rates lower than that of personal loans, making them a more viable option to cover urgent needs.
 

In a nutshell, the above three ways can help you manage liquidity and avoid penalties on premature withdrawals during unexpected expenses.  

Read More: All you Need to Know the secret of a Loan Against Fixed Deposit