Premature withdrawals invite a penalty

One should always make up the mind before investing in a fixed deposit because if the money is fixed for long term and the individual wishes to withdraw it before the maturity then he will receive lower returns. In case the bank is offering 9 percent interest for a one year deposit and 9.5 percent for 5 year term, then it is advisable not to get tempted to go for the longer term if there is a possibility of immediate need for the money.

If the person opts for a 5 year fixed deposit but breaks it before the tenure then he will get the rate applicable for the one year deposit and plus the person will have to be pay a premature withdrawal penalty which will lower the rate by one percentage. There will be a loss because instead of gaining half a percentage point the person will land up losing 1 percentage point. Thus to avoid this follow the ladder system.