High returns: Multiple Smaller FDs or one Consolidated Fixed Deposit?

Fixed deposit schemes are becoming increasingly popular amongst the masses, owing to surging interest rates and a heightened sense of asset security. This phenomenon has become all the more prominent post the rigorous repo rate hikes commissioned by the Reserve Bank of India (RBI), which consequently prompted FD interest rates to escalate across the board. Now, most providers’ interest offerings fall between 7-8%, with senior citizens being eligible for some special benefits and rates as well. 

As a potential FD account holder, you have two options. You can either park all your idle assets into a consolidated FD for a stretched period of time or choose to go for multiple small fixed deposits. Both pathways come with their own set of advantages and limitations, as elaborated below.

One Consolidated Fixed Deposit

Some advantages of going down the consolidated FD route include:

• Simplicity: You can easily manage your assets by booking a single FD, which will involve minimal paperwork
• Higher rates of interest: When you park a larger amount of money in one FD, you’re eligible to enjoy higher interest rates
• Convenience: With a single, consolidated fixed deposit, you will be able to obtain a large lump sum, when the instrument hits maturity.

There exist some downsides to opting for consolidated a fixed deposit, as stated below: 

• Liquidity concerns: The liquidity of your idle funds is significantly impacted by the predetermined tenor of your consolidated FD. If you choose to terminate the same before maturity, you’ll be liable to pay some penalties to your provider, too
• A fixed rate of interest: Banks keep upgrading and revising their FD interest offerings. When you hold a consolidated fixed deposit having a longer tenor, you’ll not be able eligible to benefit from these periodic upgrades.

Multiple Smaller Fixed Deposits

Dividing your money into smaller FDs with different maturities comes with the following advantages: 

• Higher rates of interest: When you park your funds into several smaller FDs, you can potentially reap more interest, owing to the interest rate revisions commissioned by banks/NBFCs on a regular basis
• Enhanced liquidity: With each of your FDs hitting maturity after a short period of time, the liquidity of your assets will be improved considerably
• Choosing multiple providers: When you want to park your assets into multiple fixed deposit schemes, you have the option to opt for several plans offered by different banks/NBFCs, thereby reducing the risks involved, if any. As the India Post is backed by the Government of India, it stands as a credible provider of FDs. Post office FD rates usually range between 6.90% to 7.50% p.a.

It is also important for you to be aware of certain limitations that come with booking multiple FDs, as elaborated below: 

• Complexity: Owning and managing several FDs will involve more paperwork when compared to a single, consolidated FD
• Tracking inconveniences: When you have several fixed deposit plans in your savings portfolio, tracking and monitoring the progress of each one of them can turn into quite a hassle

Unfortunately, there isn’t a one-size-fits-all solution for you to abide by, when it comes to picking between the two alternatives. It is advisable for you to analyse your unique financial goals and requirements and then take a call. Nonetheless, you can follow the consequent tips and tricks, to maximise your FD returns: 

1. Book an FD under your parents’ name: If your parents are retired individuals, then it can be a viable option to start a fixed deposit plan for them. Returns generated via FDs held by senior citizens aren’t subjected to taxation. What’s more, senior citizens are eligible to benefit from special interest rates, too.
2. Opt for a cumulative FD: Cumulative fixed deposits, i.e., those instruments which give out returns at the time of maturity, are known to award greater lump sums, owing to the power of compounding. Typically, these tools add the interest to the principal amount every quarter or every year, which is then given to the account holder altogether, when the cumulative FD concludes its term.
3. Avoid breaking FDs prematurely: Premature withdrawal is always subject to penalties, which are imposed by the provider. Therefore, is advisable for you to avoid closing your fixed deposits before they complete their tenor. Instead, you can go for multiple FDs with smaller tenors, which will help you to increase their liquidity and have access to funds when faced with unforeseen adversities.
4. Use an FD laddering strategy: Firstly, divide your funds into multiple FDs that come with different tenors. Say you wish to park ₹5 Lakhs in an FD. Instead of doing so and locking your funds into a single FD plan, divide the amount into 5 fixed deposits of ₹1 Lakh each, having maturities of 1 year, 2 years, all the way up to 5 years. When you do so, one of your FDs will hit maturity every year, which you can then park into another FD offering an even higher interest rate. At the same time, the liquidity of your assets will be boosted, too.