Introduction
You have a very important decision to make when a fixed deposit (FD) matures. You can either renew the FD or book a new FD. This decision will determine the interest rate, tenure, and ultimately how much the FD is worth when it matures again.
The Reserve Bank of India (RBI) changes the repo rate frequently which causes FD interest rates to change. There are many different ways to maximize your returns, for example, using an FD interest calculator to see which option is the best for you.
What happens when you renew an FD vs what happens when you book a fresh FD
When an FD matures, if you choose to renew it, the bank takes your principal (and interest, if it is cumulative) and puts it into another FD at the new prevailing rate. This can happen automatically if you have auto-renewal set, or you can do it manually.
Choosing a fresh FD is different. This means you have to take the matured amount out and open a completely new deposit. This gives you the freedom to change banks if you want, change the tenure, or take advantage of new rate specials if they are available.
When Does Each Option Give Better Returns
The answer depends primarily on the interest rate environment at the time your FD matures.
If rates are falling as the RBI cuts the repo rate, renewing your FD quickly locks in the current rate before further reductions take place. In a declining rate cycle, your renewal has an advantage as it captures the rate before the next revision.
If the rates are increasing, opening a new FD may be ideal, as you can wait a bit for the rates to peak, then secure a longer tenor with a higher rate. A new FD also allows you to spread your corpus over varying tenors (a technique known as FD laddering), where some portions of your corpus become available for use at different times, optimizing liquidity and increasing your average returns.
Comparing maturity values of both scenarios using an FD calculator is recommended. Enter your principal with the rates for renewal and fresh FD for your chosen tenors to determine which scenario is more profitable.
Senior citizens should find out if the bank provides an additional rate advantage for renewals vs new bookings, as this can differ from 0.10% to 0.50% depending on the bank.
Conclusion
There is no universally correct answer for whether one should renew an FD or take out an FD for the first time. Each person’s combination of how the interest rate for fixed deposits aligns with their liquidity needs and whether there are special schemes determines how an answer is arrived at. If interest rates are falling, then a quick renewal locks in those rates. If interest rates are rising, then a new FD provides the most options, especially considering rate increases and reorganizing deposits. Use an FD interest calculator to estimate the total expected interest and choose the best option for your savings goal.
