Maintaining a term deposit account or you may say a fixed deposit in a bank is a pretty simple task. Nowadays without visiting a bank, you can open directly through your internet banking. All is done digitally both opening as well as closing of your account.
At times when your fixed deposit gets matured you do not get the proceeds, instead, it is extended for another term of the same tenor. It happens when you do not give a term deposit maturity mandate while opening a fixed deposit account.
Your fixed deposit will keep on renewing as long as you do not direct your bank to a proper mandate.
The term will be the same but normally rate of interest gets decreased. It depends from time to time as the interest rates of banks keep changing as per their policy.
The best part is you can discontinue anytime as you please and withdraw your cash.
What is term deposit auto rollover?
Auto rollover of term deposit means when your term deposit matures and you do not claim for closure.
The FD will get renewed and extended for another term of the same tenor at the present effective rate of interest.
It is a feature of term deposit where it automatically gets rolled over for another term as per the mandate given by the account holder.
You can always avoid this by choosing what to do when your term deposit matures.
Normally there are three options you get while filling out the application
- Auto-renew principal and repay interest
- Repay principal and interest
- Auto-renew principal and interest
If you choose the last one, your fixed deposit will get rolled over every time it matures.
Also, if you do not choose any of these, the system normally picks auto rollover by default.
Will the new term deposit have the same rate of interest?
Interest rates will be different every time your term deposit gets rolled over. Technically when your account gets rolled over system normally picks the present effective rate of interest. It may get decrease or increase depending on the bank’s policy guidelines.
Benefits of auto rollover
Of course, auto rollover has its own benefits. At times, it becomes a very useful tool for those who do not want to think over their term deposits’ maturity proceeds. Banks normally notify their clients when a term deposit is about to mature. If you do not do anything, it will get rolled over automatically.
It will go on over and over again as long as you do not intervene and you will get higher returns in the long run. It’s one of the safest modes of investment as risk involvement is almost zero.
You may choose only the principal amount to get it rolled over and withdraw the interest portion every time your fixed deposit gets matured. Or you may choose both the principal and the interest you have earned, to get it rolled over. In this case, your new principal will be the total fund accumulated at its maturity.
The best part is, you may close your term deposit as and when you need funds. Most Banks normally allow premature closure of term deposits. There may be some penalty imposed for that, which is a nominal small amount.
It depends on bank to bank, for State Bank of India interest payable will be the applicable rate for the period for which the term deposit has run minus a 1 percent penalty.
If you do not like it at all, just give your bank a clean mandate to close the term deposit at its maturity and credit the proceeds to your savings or current account.
What you are losing when your FD gets rolled over!
You definitely lose your capacity for higher income generation. When your term deposit gets rolled over, your fixed deposit rates will get lower than the previous one. It is not like every time your term deposit rollover the rates will be decreased, it may be increased too.
But, considering the current market trends it is more inclined toward decreased rate of interest. As such it becomes a somewhat less income-generating tool for financial management. You may have many other investment options where you can get higher returns with a little risk involvement, such as SIP, Mutual Fund etc.
Overall, term deposit auto rollover is good as it would enable one to continue his term deposit for a longer period thereby earning better returns. However, you should keep in mind that, it will not yield higher returns as at present almost all banks are offering less rates of interest.
For fund accumulation and growth, one should look for investment in pure equity or a hybrid kind of fund for long-term investment. The rest is up to you.