Fixed deposit or FD is an investment strategy where you deposit a certain amount of money for a fixed period and earn steady interest on it. To earn more from your FD, it’s important to choose one with higher FD interest rates, which can help your initial deposit grow faster and give you better overall returns.
FD generally runs for a fixed period, typically 1 year, 2 years, etc., based on your requirements. However, once the Fixed Deposit matures, you can consider reinvestment strategies.
What is meant by FD reinvestment?
FD reinvestment is a plan where you reinvest the money when it matures. Reinvesting is putting both the principal and interest from maturing FDs into new deposits with longer maturities that can help compound your returns over time.
The FD reinvestment strategy is generally used to maximise the returns and manage your funds effectively. Using a Fixed Deposit Calculator, you can know the returns on your deposits even before investing.
Important FD reinvestment strategies
There are several FD reinvestment strategies that you can use to maximise your returns. These include the following.
FD laddering
One of the best reinvestment options is FD laddering. Under this option, you divide the principal amount into multiple FDs with staggered maturity dates.
Instead of putting a lump sum amount into one FD, distributing it over multiple FDs with different maturity tenures allows you to reinvest the amount at high FD Interest Rates.
This is an especially beneficial strategy for individuals who need better liquidity and the flexibility to take advantage of changing interest rate trends.
Cumulative FDs
Another reinvestment strategy once the FD matures is to opt for cumulative FDs. Under the cumulative FD, the interest earned at maturity is added to the principal amount. This scheme generally helps in increasing the final maturity amount.
This type of FD plan is beneficial for individuals and families who want to build wealth over time and do not need a regular payout from their investment.
Tax-saving FDs
Another reinvestment strategy to follow when the Fixed Deposit matures is to invest in tax-saving FDs with a 5-year lock-in period. By doing this, you will get a deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act.
This type of reinvestment option is crucial for investors in higher tax brackets who want to reduce their tax liability.
Senior citizen FDs
Lastly, one important reinvestment strategy is to invest the amount in the name of a senior citizen. Individuals aged 60 or older generally receive higher FD interest rates, typically 0.25% to 0.75% above regular rates.
Moreover, such investment is also available for TDS exemption up to ₹50,000. It is beneficial for individuals who are looking to maximise their returns.
When to choose FD reinvestment?
The FD reinvestment option is a good option in the following circumstances:
- When you do not require a regular income.
- When the risk tolerance is generally very low.
- If you have a long-term goal
Key takeaways
An FD reinvestment is a suitable option to maximise your returns. However, before investing, it is best to compare FD interest rates from different financial institutions.
You can also use a Fixed Deposit calculator to estimate your potential earnings. Once you are sure everything is in order, consider reinvesting the matured FD amount into a new deposit with a higher interest rate.