Personal Finance Exclusive
Best Returns: Short-term FD or Flexi FD?

You have funds available for short-term and want to get the best returns. Do you go for flexi FD with your savings account or open a short-term FD?

You may have funds ready for investing in upcoming IPO (initial public offering) or tax-free bond issues that will come out over the next six months or in chosen stocks when the market declines. You can park your short-term fund outside banks like liquid funds with no entry and exit load, but what to do if you want to stay within the banking system? Opening a savings account paying 6% to 7% per annum (p.a.) interest for balances below and above Rs1 lakh respectively is a possible solution, but you can earn better returns if you are willing to lock your money in seven-day fixed deposits (FD) or have a flexi FD account with your savings. Chasing high interest savings account is easy, but having multiple saving accounts may not always be desirable. So, what are the choices?

Short-term FD:

Rates vary widely among banks from 4% to 7% p.a.; State Bank of India (SBI) is a good bet. Ideally, look for short-term FD with no penalty clause as you may not be really sure when you need your money. SBI offers the same interest rate (6.5% p.a.) for a period of seven days to less than one year. It offers ‘unfixed’ FD of 180 days @6.5% p.a. interest without any penalty clause on premature withdrawal; FDs of less than one year @7.5% p.a. interest without any penalty clause (for minimum amount of Rs15 lakh).

If you feel that interest rates are likely to come down, instead of opening seven-day FD for short-term needs, go for SBI ‘unfixed’ 180 days (FD amount less than Rs15 lakh) or less than one year (FD amount more than Rs15 lakh) to get interest of 6.5%p.a. and 7.5% p.a. respectively. Premature withdrawal will not mean any penalty and falling interest rates will not impact you till the term of the FD. You will earn better than a high-interest savings account; you just have to take trouble to open the FD!

Indian Overseas bank (IOB) is another option which offers 7% to 8.5% for FDs for period seven days to less than one year; 7.75%to 8.5% for amounts greater than Rs25 lakh for same period. Bank of Maharashtra has no penalty for premature withdrawal for FD term up to one year.

Among private banks, Karur Vysya offers an interest rate of 7.8% to 8% for FDs for period 31 days to less than one year. Flexi term deposit of 300 days for FD amount Rs15 lakh and above offering 8.25% without penalty for premature withdrawal after just 15 days of deposit is a good scheme for short-term parking of funds for HNIs (high networth individuals).

Savings with flexi FD:

The main advantage of this product is that the depositor is able to enjoy both the liquidity of savings or current accounts as well as the high returns of a FD. These products have two common features.

Sweep-in: Balance in excess of a stipulated amount is automatically transferred to a FD for a default term.

Sweep-out: In case of shortfalls in the savings account to honour any debit instruction (e.g. when the customer wants to withdraw money through cheque or ATM), the balance in the FD account to the extent needed for meeting the shortfall is automatically withdrawn usually in multiples of Rs 1,000 often by in LIFO method (Last Flexi FD created is the first to be broken). The remaining balance in the FD continues to earn higher interest at the original rate applicable to FDs. Hence, effectively, this scheme is linking of savings or current account with a FD.

Here are main disadvantages of a Flexi FD

  • Cash or cheque withdrawal may entail breaking the flexi FD. If it happens within seven days of flexi FD opening, you will not get any interest. You may not be able to time when the flexi FD gets automatically opened by the bank (based on your savings account balance) and when you need to withdraw money. Breaking the flexi FD at wrong time means losing interest of one to six days. Keeping the amount in plain savings would have yielded at least 4% p.a. as it is calculated on a daily balance.
  • Flexi FD term and amount can vary among banks. Cosmos Bank has a flexi FD term of 30 days which pays 7% p.a. for FD in multiples of Rs5,000. In case one breaks the flexi FD after seven days but before 30 days, the interest rate for the flexi FD will be only savings rate for the amount of Rs5,000. This is much lower than what you would have got with SBI seven-day FD for 6.5% p.a. Again, you may not be able to time yourself to ensure that flexi FD completes 30 days to get 7% p.a.

    Read this space regularly for more articles on long-term FD, RD, debit cards, Know-Your-Customer (KYC) requirements, lockers, RTGS, NEFT, online access and transfers, etc.

    You may also want to read about How to earn 7% in a savings account with no minimum balance


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