3 Tips To Earn Higher Interest On Fixed Deposits

It is likely that is your bank has deducted interest rates after RBI's repo rate cuts in 2020. The outlook for interest rates on savings and fixed deposits in the coming months also looks bleak considering the significant economic damage caused by COVID-19, which will force the central bank to keep repo rates low, in order to infuse liquidity and push economic activity.

Without getting into the technicalities of why interest rates would stay low for a while, here are some tips to help you make the most of interest income on your deposits.

1. The power of compounding

Compounding in simple words would mean earning interest on interest. It means that when your bank gives you interest on your deposit (of any kind), it is calculated on the original principal amount of deposit. In the second time that this interest is calculated, it will consider "the principal + first interest = new principal" to calculate interest for the second phase.

The power of compounding, while may seem like simple logic, is often ignored. It adds profit back to the principal to reinvest the whole amount to earn a larger profit.

While the main ingredient in compounding is time, you can make the most of it in an FD by checking the compounding frequency which could be daily, quarterly, monthly, half-yearly or annual.

If you are not looking to withdraw regular income, like monthly withdrawals of interest on FDs made by senior citizens, you can compare the compounding frequencies of various FDs, and pick with one with shortest compounding interval because: shorter the interval, higher the interest.

2. Apply Online

Some banks and financial institutions like NBFCs offer special FD schemes only for investors choosing the online mode of application. These FDs even offer additional interest on regular rates to attract investors.

Apart from providing high-interest prospects, these are easy to apply and also have lower processing fees.

Applying online also helps you make a good comparison of rates offered by your bank's competition and choose the best option for your investment tenure.

Flexi-deposits or auto-sweep-in schemes

These are special deposit schemes offered by commercial banks in India that essentially combines the features of savings and current accounts and fixed deposits.

When opted for the deposit, the balance in excess of a stipulated amount is automatically transferred to an FD account for a default term (say one year). Later, when you need the money or when your savings bank account starts running low on funds, the fixed deposit will be automatically dissolved and money will be moved to the savings account to meet the shortfall. This ensures that money in your bank account is not left idle and you receive better returns when compared to a regular savings bank account.

The convenient part is that you do not need to track idle funds regularly and only need to give instructions to the bank to create term deposit out of your savings account. The process of transferring money into fixed deposit happens automatically after you have provided instructions to the bank to avail the facility.