Auto-renewal of FDs may not be a good option for you1 min read . Updated: 22 Oct 2020, 08:59 PM IST
Experts say that you may not get the best interest rate in case you opt for the auto-renewal option, especially in the current falling interest rate scenario
Auto-renewal option offered by banks is a good feature that allows reinvestment of the maturity proceeds in fixed deposits (FDs). Using this option, depositors can save on the interest that they might lose in case they don’t renew the FD. In case of online FDs, the maturity proceeds are credited to the savings bank account.
However, experts say that you may not get the best interest rate in case you opt for the auto-renewal option, especially in the current falling interest rate scenario. Therefore, it will be better for investors to do it manually for greater flexibility.
“The policy for auto-renewal vary from bank to bank. While some renew for the same period as the original FD, others may renew 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," said Adhil Shetty, CEO, BankBazaar.com, a financial services platform.
The auto-renewal option saves depositors from the pain of visiting the branch or using the internet banking facility. “The flip side is that you may not get an optimal deal on interest rates as banks frequently change FD slab rates of different tenures depending on their rate outlook and other factors," said Sahil Arora, director, Paisabazaar.com.
Therefore, it is better to use a money-management app or set manual alerts that remind you to renew FDs instead of auto-renewal option. Also, most banks inform depositors about FD maturities via SMSes. In case depositors do it manually, they can do it after factoring in their investment horizon, liquidity requirements and the slab rates offered at the time of renewal.
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, 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.