Why avoiding auto-renewal of bank fixed deposits could get you better return now You may be missing out on an opportunity to earn a better interest rate from your fixed deposit if you have opted for auto-renewal now. ET Wealth explains how auto-renewal of FDs works and when you could opt for it and when you could avoid it
In case you are not able to keep a track of your multiple investments such as fixed deposits (FDs), you may opt for the auto-renewal option offered by banks. However, auto-renewal may not be the best option for investors, especially in the current scenario, when the interest rates on deposits are rising. You may be missing out on an opportunity to earn a better interest rate from your fixed deposit if you have opted for auto-renewal now. This can go as high as one to one-and-half per cent. Let's understand how auto-renewal works.What is an auto-renewal option in FDs?
If you have opted for the auto-renewal option in your fixed deposit, the proceeds will be reinvested in the FD of same tenure at the time of maturity. When you make a deposit, a bank usually asks you if you want to opt for the auto-renewal option on completion of the term or want to take the maturity amount. It is tempting to go for the auto-renewal option so that if you have no time to track your fixed deposits, you don't lose out on the interest even for one day after the deposit matures. But this invest-and-forget approach can cost you a price when it comes to fixed deposits during a rising-interest regime.
Explaining it further, Adhil Shetty, CEO, of BankBazaar.com, "Enabling auto-renewal of FDs ensures that the FD gets reinvested each time it matures. This makes sure you don't miss out on any returns. However, they may not be the best alternative."
"First, the renewal may be for a fixed term. You may not be able to adjust the term as per your preference. Moreover, it may not necessarily be the term providing the best returns," Shetty explained.
For instance, you have opened a fixed deposit at a 5 per cent interest rate in 2020 for three years. You have selected the auto-renewal option while booking your deposit. So, the deposit will be renewed at the prevailing rate for the same tenure on maturity which is five years. What if at that time, maybe a 700-day deposit offers a better interest rate than a five-year one? So, in this case, you will be missing out on a better return from your investment just because you have selected the auto-renewal option.
Limitations of auto-renewal option
The auto-renewal option saves depositors from the hassle of keeping a track of their FDs or visiting the bank branch. However, at a time when banks are increasing deposit rates so frequently, it is better to avoid auto-renewal option. "As the banks frequently change the fixed deposit slab rates of their various tenures depending on their interest rate outlook and other factors, depositors opting for auto-renewal may not get the optimum interest rates at the time of FD renewal," said Gaurav Aggarwal, Senior Director, Paisabazaar.
So, it is better to use a money management app on your smartphone or set alerts on the calendar (phone or email) that remind you to renew FDs instead of opting for an auto-renewal option. Moreover, most banks inform their customers about their deposit maturities through SMS. "Thus, depositors comfortable with internet or mobile banking can easily re-open new FDs on the same day through mobile banking and internet banking after factoring in their investment horizon, liquidity requirements, and the various FD slab rates offered by their banks," said Aggarwal.
Track and pick the best tenure for your FD investments
"Since interest rates are in an uptrend currently and might peak soon, it might be a good idea not to set FDs to auto-renew. Instead, manually book FDs near peak rates for the longest possible tenure if you park substantial amounts in bank FDs," said Dev Ashish, a SEBI Registered Investment Advisor and founder, of StableInvestor.com.
Senior citizens can make an entry in the diary or set a reminder on the due date. In this way, investors will easily switch to another term or maybe another bank depending on the rates available when your FD matures and get a better interest rate, said experts.
Fixed Deposits: Be flexible in shifting to a new tenure or bank for better return
Many depositors usually go for an FD with the same bank where they have their savings accounts. Instead of getting into trouble with auto-renewal, they can opt for credit of their maturity amount to their savings account. "Doing so would allow them to compare the FD rates offered by various banks for their various FD slabs and accordingly, select the best FD rate after considering their liquidity requirements and investment horizons," said Aggarwal.
Can you modify the FD auto-renew option which you chose earlier?
If you have chosen the auto-renewal option while opening your FD, you can modify it before your deposit matures. You can visit your bank branch and change the mandate before your deposit maturity date. Do remember once the fixed deposit is up for renewal after the maturity date, you will not be able to change it. Then, you have to break it, you have to let go of the additional interest and premature withdrawal penalty for the auto-renewed fixed deposit.
Who should opt for FD auto-renewal option?
Those who do not have time to track their fixed deposit investments can opt for an auto-renewal facility. The bank will automatically renew the deposit when it matures. So, you won't lose out on the interest even when you forget to withdraw your money when it matures. While it will ensure that you get much better return than the saving bank interest however it may not give you the best rate either. Do remember that even if you have opted for auto-renewal, you can modify the mandate before the deposit matures.
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This story originally appeared on: India Times - Author:Faqs of Insurances
