Posted on Jan 7, 2025
A Guide to Fixed Deposit Auto-Renewal
As a society, we always wanted peace of mind. Fixed deposits offer the same when talking of financial products. No hiccups on the way due to market fluctuation. You get what you are promised when booking a fixed deposit. Around 95% of Indian households repose faith in fixed deposits as per the SEBI survey. Among the many popular features, there’s one fixed deposit auto renewal option. As a user, you may ask - how it’s going to add value to my investment portfolio, how it will help prosper my investment journey, and so on. In this blog, we’ll discuss auto renewal of FD, its benefits and other aspects. With that, you’ll get answers to these questions. Let’s get started!
What is Auto Renewal in FD?
Auto-renewal refers to a situation where your fixed deposits renew automatically on maturity. The tenure on an auto fixed deposit renewal remains the same as the original deposit tenure. No manual intervention - the hallmark of this facility! In today’s times where a hectic schedule takes over, people often forget to do important things such as renewing a fixed deposit. With the automatic fixed deposit renewal facility, you solve this problem! Banks renew your fixed deposits, allowing you to pay attention to your work and life.
Benefits of Using the Automatic FD Renewal Facility
Auto-renewal of fixed deposits, inevitably, has obvious benefits for investors. Let us showcase all of them below.
Easy Renewal
Using the auto renewal option of fixed deposits eliminates the need to renew manually, which is handy considering the paucity of time in today’s busy life. No more KYC and the time it takes to renew a fixed deposit account.
Interest Earnings Remain Uninterrupted
There’s no pause to interest earnings with a fixed deposit auto renewal facility. The interest accumulated on a fixed deposit is reinvested automatically on maturity, eliminating the scope for any day without earnings.
Enhanced Scope to Continue Earning at Higher Fixed Deposit Interest Rates
When choosing the auto-renewal option with tenure the same as the original tenure, you lock in higher return rates on a fixed deposit. Let us showcase an example below to understand its importance.
Example - You lock a fixed deposit of INR 5 lakh at a 9.30% interest rate for three years and add an auto-renewal option for the original tenure. Suppose you choose the quarterly interest compounding option, the total amount, including interest, will be ₹6,58,796 at the end of three years. This amount will be reinvested for another three years, taking your overall wealth to ₹8,68,025.
In contrast, someone did not avail of the auto-renewal option at the time you did. And if he wants to renew on maturity where the interest rate falls to 7%, he will get ₹8,16,037 over six years (original three years + three years afterward). See the difference - ₹62,224 (8,78,261-8,16,037) less than when using the auto-renewal option.
Option to Adjust Investment Amount and Tenure
As an investor, you have the option to adjust tenure and principal amount when using auto renewal of FD. Such a thing only enhances flexibility for investors.
No Time is Lost When Renewing a Fixed Deposit
With the auto-renewal option, you don’t lose precious time going through the process you had when opening a fixed deposit account. The KYC process involving documentation can be time-consuming. With that being eliminated, you have plenty of time to work and enjoy.
Fixed Deposit Renewal Processes
There are two ways by which you can renew a fixed deposit - Automatic and Manual.
Automatic Renewal
You can set standing instructions for automatic renewal when opening a fixed deposit account online or at the bank branch. When setting standing instructions, choose the investment amount and tenure wisely. Because your renewed fixed deposit will operate based on these details. Carefully chosen details will ensure high-interest earnings and increased investment flexibility. Something as an investor we appreciate.
Manual Renewal
The name itself defines it! You need to renew a fixed deposit on maturity either online or by visiting the bank branch. In case you didn’t choose the tenure that had high interest rates while opening a fixed deposit account, you can do so with the manual renewal option. Just check the prevailing rates and renew your fixed deposit accordingly to earn more after renewal. You can certainly recover some lost grounds if not all of them.
Is There Any Problem If I Don’t Renew My FD?
Banks will credit the amount, including interest, to your savings account. However, you miss out on adding to your earnings with the non-renewal of fixed deposits.
Who Should Opt for Auto Renewal of Fixed Deposits?
Auto renewal of FDs will likely suit people who don’t want a bulk amount immediately. They must have a good amount of savings already to rely on for immediate needs. These investors want to accumulate wealth for the long term. With auto-renewal, they can fulfil their aspirations of a strong financial future.
Factors to Consider Before Choosing Auto Renewal
Evaluate Current Interest Rates
Choosing the auto-renewal option on a fixed deposit depends on your current interest rates. They must be high to earn you a substantial amount. Usually, interest rates remain higher for a 3-year deposit period compared to other tenures. In today’s times, interest rates are on the rise with banks offering as much as 9.30% per annum. But there may be times when the interest rate cycle will go downwards. Even at that time, the rates for three years will likely be the maximum across banks. So then, if the rate stands at 7.50% per annum for three years, you can put the auto renewal option on hold. Let the journey begin and as you come near maturity, see the interest rate prevailing at that time. If the rate goes up, get in touch with the bank officials to include an auto-renewal option for the tenure that yields the maximum interest rate.
Assess Your Financial Goals
Financial goals are also an important consideration before exercising the auto-renewal option on a fixed deposit. As an investor, you must have set your sights on accumulating a specific amount over a specified period. See the prevailing interest rate and the lump sum amount you have, to build upon. Break the overall investment period into two parts. See the tenure that yields you maximum earnings.
For example, the interest rate for three years remains the maximum across banks. Choose two investment periods of three years each. Then see how far the interest rate is taking you to your financial goals. Check the same using the fixed deposit calculator online. If you come close to the total you want to build, use the FD auto-renewal option. Else up your investment amount to generate the desired corpus.
Final Words
The benefits of fixed deposit auto renewal are impressive. High yield, continuity in earnings, and the flexibility to adjust investment amount and tenure are indeed a delight for investors seeking to build wealth over the long term. It’s all about being aware of the interest rate cycle. Choosing the right interest rate and investment amount is pivotal to achieving your financial goals.
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