Monday, November 7, 2011

Money in savings account vs fixed deposit

RBI has been hiking REPO and Reverse REPO rates and that has brought smile to individual account holders. Due to rising REPO and Reverse REPO rates, bank in turn have hiked deposit and loan interest rates. And it is upto us to take advantage of this fact. 

If your money is lying in savings bank account, then it would not be earning more than 4% per annum which is meagre compared to fixed deposit (FD) rates which are approximately 9.5% pa. What can you do to take advantage of these rate hikes? 

You can park your money in FD accounts. As the rates of FD are fluctuating you can open an FD for shorter duration like 2 months. This will give you flexibility of withdrawing funds after 2 months. And if rates still increase, you can then park your funds with FD giving more interest rates. 

You should not stick with opening FD with only your bank because your bank might not be the best bank in the town providing attractive interest rates for FD. 

Some nationalized banks are offering FD interest rates as high as 8.5% pa for even shorter duration like 1 month. One of such banks is Corporation Bank.

Lets take an example of 2 lakh rupees lying in your savings bank account vs putting the same in FD for 1 month:

Interest earned:
Saving bank account: 2 lakh * 4 / 12 / 100 = 666.66 rs
FD account: 2 lakh * 8.5 / 12 / 100 = 1416.66 rs

As you can see, it makes a lot of difference in the interest you get. Moreover, it doesn't take much documentation to open an FD. It is simple. You generally need these documents to open an FD:

1. ID proof
2. Address proof
3. PAN copy
4. Photograph(s)

Some banks have started online facility for applying for FD. However, they might not be giving the best FD rates like SBI gives 7% pa for 1 month duration. Compare it with Corporation bank which gives 8.5% pa for 1 month. However, the latter doesn't provide online facility for applying in FD.

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