Reinvesting in Fixed Deposits: Benefits and Drawbacks

The primary benefit of Fixed Deposits is that the returns are calculated on the basis of compound interest method. Reinvesting your Fixed Deposit (FD) can help maximise your returns for long-term wealth growth. This blog will help you compare the pros and costs of FD reinvestment, ensuring you make an informed decision.

What is Reinvestment Fixed Deposit Plan?

A Reinvestment Deposit Plan (RDP) allows you to reinvest the interest accrued on your deposit, enabling your money to grow more through compounding. This plan is suitable for individuals, traders, self-employed persons, and salaried individuals seeking to maximise their savings. 

Reinvestment FD Benefits

Reinvestment fixed deposits come with several notable benefits:

• The Compounding Power: By reinvesting the interest earned, you can significantly increase your returns over time. The compounding effect is particularly advantageous if you plan to keep your savings invested for the long-term.
• Loan Facility: In FD reinvestment, you can avail of loans on both the principal and the accrued interest, providing liquidity without breaking your FD.
• Minimum Deposit Requirements: The minimum deposit amount varies across banks and could be as low as ₹1,000. 
• Tenure Range: The deposit tenure usually ranges from 6 months to 120 months, with quarterly compounding and interest paid at maturity.

Despite so many reinvestment FD benefits, there are some drawbacks too that you should know about.

Drawbacks of FD Reinvestment

While reinvestment fixed deposits offer substantial benefits, there are certain drawbacks to consider:

• Premature Withdrawal Penalties: If you need to access your funds before the FD matures, you may face penalties. Banks usually impose a penalty for early withdrawal, which can range from 0.5% to 1% of the interest rate. Also, you will be only eligible for the interest rate applicable at the time of withdrawal, which could differ from the promised rate.
• Reduced Interest Rates: The interest rate applied to your reinvestment fixed deposits is generally the same rate you were earning before. This restricts your ability to capitalise on higher rates, provided the bank decides to increase FD rates.
• Complex Decision-Making: Deciding whether to break your FD and reinvest depends largely on the remaining tenure and current interest rates. This requires careful consideration and comparison of potential returns.

Keeping in mind these drawbacks of FD reinvestment, you should carefully plan your FD withdrawals and reinvestments in a way that suits your financial targets.