Should you opt for auto-renewal option in Fixed Deposits?
In case you invest in multiple fixed deposits (FDs) and are not able to keep track of them, you may opt for the auto-renewal option offered by banks where the maturity proceeds are reinvested in the fixed deposit at the time of maturity.
Using this option, depositors can save on the interest that they might lose in case they don’t renew the FD and the money lies in their savings bank account. In case of online FDs, the maturity proceeds are directly credited to the savings bank account of the depositor.
However, experts say that you may not get the best interest rate in case you opt for the auto-renewal option of FD, especially in the current falling interest rate scenario. Therefore, it will be better to do it manually for greater flexibility.
“The policies for auto-renewal vary across banks. While some may renew for the same period as the original FD, others may have a policy for renewing only for a specific period, say one year. However, this may not be the best interest you can avail of. So, if you were manually renewing the FD, you might do it for, say, 15 months to get the highest rate of interest, but the bank will renew it for only a year as per their policy,” said Adhil Shetty, CEO, BankBazaar.com, a financial services platform.
The auto-renewal option saves FD depositors from the pain of visiting the branch or using the internet or mobile banking facility. “The flip side is that the depositor may not get an optimal deal on interest rates as the banks frequently change FD slab rates of different tenures depending on their interest rate outlook and other factors,” said Sahil Arora, director, Paisabazaar.com.
Therefore, it is always better to use a money-management app or set manual alerts that remind you to renew FDs instead of opting for an auto-renewal. Also, most banks inform their depositors about the FD maturities through SMS, therefore, depositors can re-open new FDs on the same day through mobile banking and internet banking.
In case depositors do it manually they can do it after factoring in their investment horizon, liquidity requirements and the various FD slab rates offered by their banks at the time of renewal of FD.
You need to inform the bank before maturity that you would not be renewing the FD and that the auto-renew instructions should be cancelled. “If the depositor doesn’t inform the bank, it will renew the FD as per their policy, and you may have to pay a penalty if you break the FD,” said Shetty.
Therefore, the auto-renewal option may not suit those depositors, who want better flexibility and control. “Given the fact that FD returns are at their lowest in years, it is advisable to use online tools, apps, and alerts available to manage your investment instead of opting for an auto-renewal. This will give you greater flexibility in terms of investment options,” added Shetty.
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