Fixed Deposits (FDs) are a popular way for people to save money and keep it safe. With regular FDs, you get a fixed interest rate throughout the deposit period. But there’s another option called Floating Fixed Deposits. These let you earn interest rates that might go up or down while your money is in the deposit. In this blog, we’ll talk about how Floating Rate Fixed Deposits work, why they’re useful, and what to think about if you want to invest in them.
What is a Floating Rate Fixed Deposit?
A floating rate term deposit is a special type of fixed deposit where the interest rate changes with the ups and downs of a specific reference rate. This rate isn’t fixed like in regular fixed deposits (FDs). Instead, it adjusts regularly, keeping up with changes in the market. This means you can benefit from interest rate changes without having to close and reopen your deposit.
This type of deposit might be perfect if you’re comfortable guessing how inflation and interest rates will move in the future. The interest rates are linked to the Treasury Bill rates of the bank. These rates are decided every two weeks in an auction on the Reserve Bank of India (RBI) website, with a markup that changes once a year.
Features of Floating Rate Fixed Deposit
Floating rate term deposits have these features:
- Anyone can open one, whether alone or with someone else, even minors or the head of a Hindu Undivided Family (HUF).
- You need at least Rs.10,000 to start, but you can’t deposit more than Rs.1 crore.
- The interest rates change based on how much the government pays on its short-term loans, which is decided every three months.
- Unlike regular fixed deposits, the interest rates can go up or down, so there’s no fixed end value called the Confirmation of Deposit (COD).
Benefits of Floating Fixed Deposits
Here are the benefits of floating fixed deposit:
- Floating fixed deposits are great because they’re flexible. When interest rates go up or down, your returns change too, giving you a chance to earn more during good times.
- They help protect your money from losing value due to inflation. When prices go up, so do your returns from the deposit, helping you keep up with the higher costs.
- Unlike regular fixed deposits with long lock-in periods, floating fixed deposits often have shorter terms and more flexible withdrawal options. This means you can get your money when you need it without paying big penalties.
- You can take out a loan or overdraft using your deposit. You can borrow up to 90% of the deposit amount.
- Senior citizens get extra interest benefits.
- Interest rates get updated every three months, starting in April, July, October, and January.
- You can set up a nomination for free.
Calculating Returns on Floating Fixed Deposits
Figuring out how much you can earn from a floating fixed deposit is all about understanding how the interest rates work. Here’s a simple guide:
Step 1: Find the Benchmark Rate
Check which rate the bank uses to set the interest on your deposit.
Step 2: Know the Extra Rate
The bank adds a little extra to the base rate to figure out your final interest rate.
Step 3: Calculate Yearly Earnings
Multiply how much you’ve put in by your final interest rate to know how much you’ll earn in a year.
Step 4: Check if it Compounds
If the deposit compounds, see how often that happens (like every three months or every year).
Step 5: Do the Math Each Year
Repeat steps 3 and 4 for every year you keep your money in the deposit to know how much you’ll get when it’s all done.
Considerations When Investing in Floating Fixed Deposit
- Watching Interest Rates: Keep an eye on how interest rates are changing, especially if you’re thinking about putting your money in FRFDs.
- Access to Your Money: FRFDs might have rules about taking your money out early or needing to keep a certain amount in there. Make sure these rules match up with what you need.
- Highest and Lowest Rates: Know what’s the least and most interest you can get from the FRFD. It helps you figure out how risky it is and how much you might earn.
- Taking Money Out Early: Find out if there are any charges or if you’ll get less interest if you take your money out before you’re supposed to.
- How Often They Check Rates: Different banks check interest rates at different times. Pick an FRFD that fits with how often you want them to check.
Floating FD vs Regular FD: Which is the Better Option?
| Aspect | Floating Fixed Deposits (FDs) | Fixed Deposits |
| Falling Interest Rate Scenario | In this scenario, the interest rates offered on floating rate FDs are typically lower compared to traditional fixed deposits. The rates fluctuate with market conditions and may not provide as high returns as fixed-rate FDs during periods of declining interest rates. | Fixed deposits generally offer higher interest rates compared to floating rate FDs in a falling interest rate scenario. They provide a stable and predetermined interest rate throughout the deposit tenure, ensuring investors receive consistent returns despite market fluctuations. |
| Rising Interest Rate Scenario | Investors in floating rate FDs stand to benefit from rising interest rates as the interest rates on their deposits may increase accordingly. This flexibility allows them to capitalise on higher interest rates in the market. | However, in a rising interest rate scenario, investors in traditional fixed deposits may not necessarily benefit as their interest rates are fixed at the time of investment. They may miss out on potential increases in interest rates in the market. |
| Investment Format | Floating rate FDs can be somewhat complex for investors to understand due to the variable nature of interest rates. Investors need to keep track of market trends to gauge potential returns on their investments. | On the other hand, fixed deposits offer a simpler investment format. Investors receive a predetermined interest rate at the time of investment, making it easier to understand and plan for their returns. |
| Diversification | Floating rate FDs offer the opportunity for portfolio diversification, especially if investors spread their investments across different banks. This diversification helps minimise risks associated with investing in a single institution. | Fixed deposits can also be used for diversification, but the returns may be limited compared to floating rate FDs. However, they still provide a secure investment option for those seeking stability. |
| Liquidity | Floating rate FDs often allow periodic withdrawals up to a certain limit without incurring penalties. This flexibility provides investors with liquidity options during emergencies or when funds are needed. | In contrast, withdrawals from fixed deposits before the completion of the tenure usually attract penalties, making them less flexible in terms of liquidity. |
| Taxation | Both floating rate FDs and fixed deposits are subject to a Tax Deducted at Source (TDS) of 10% for individuals providing PAN details. However, long-term tax-saving fixed deposits may be exempt from tax, providing additional tax benefits to investors. | Both floating rate FDs and fixed deposits are subject to a Tax Deducted at Source (TDS) of 10% for individuals providing PAN details. |
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Frequently Asked Questions (FAQs)
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What’s the difference between a regular fixed deposit (FD) and a floating rate FD?
Regular FDs lock in an interest rate for the entire term. Floating rate FDs, however, have interest rates that adjust periodically based on a benchmark rate (like the repo rate) or market conditions.
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What’s the minimum and maximum amount I can invest in a floating rate FD?
The minimum investment for a floating rate FD is typically Rs. 10,000, and the maximum is usually less than Rs. 1 crore, depending on the bank.
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Why might floating rate FDs offer higher returns than fixed FDs?
The interest rate on a floating rate FD can potentially rise above fixed rates if market interest rates increase. However, it can also decrease if interest rates fall.
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Who can open a floating rate FD?
Typically, anyone can open a floating rate FD, including single or joint investors, minors (with a guardian), and the Karta of a Hindu Undivided Family (HUF).
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Can I open a floating rate FD online?
Yes, many banks allow you to open a floating rate FD online through their Internet banking platform.
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Do senior citizens get any benefit on floating rate FDs?
Yes, some banks offer additional interest rates to senior citizens on floating rate FDs, similar to regular FDs.
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Can I nominate someone for my floating rate FD?
Yes, most banks allow you to nominate a beneficiary for your floating rate FD to receive the amount in case of your demise.
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Can I get a loan against a floating rate FD?
Yes, many banks allow you to avail loans against your floating rate FD, similar to regular FDs. However, the loan amount may be based on the prevailing interest rate on the FD.
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