Flexi Fixed Deposit | Features and Benefits | How does It Work?

September 26, 2021 Mutual Fund

The various financial institutions, like banks and Non-Banking Financial Companies (NBFCs), compete with each other to attract new customers in deposits, loans, and third-party products segments. The tough competition in the financial institutions helps in making them more efficient and stimulating financial innovations. To attract new customers, banks and NBFCs come up with new products or modify their existing products periodically, offering more value to the customers and enhancing their experience.

Most of us are familiar with Savings Bank Account and Fixed Deposits. But there is a hybrid offering which offers a combination of these two product type, commonly known as Flexi Fixed Deposit. A Flexi Fixed Deposit is a smart way to invest your money in a financial instrument that offers you the liquidity of a Savings Bank Account and the higher returns of a Fixed Deposit. Read on to know what a Flexi Fixed Deposit is and how you can take advantage of it?

What is Flexi Fixed Deposit?

The conservative investors having a low-risk appetite, prefer Fixed Deposits to invest their funds for a long-term. The Fixed Deposit is one of the most popular financial instruments in India that offers the security of your funds for a higher rate of interest in comparison to Savings Accounts. With changing times, many banks have introduced modified versions of these traditional Fixed Deposits. One such type of Fixed Deposit that combines the features of Fixed Deposit and Savings Account is Flexi Fixed Deposit. It is special kind of deposit where depositor can enjoy both the higher interest rates offered by Fixed Deposits and liquidity of Savings account.

How does a Flexi Fixed Deposit work?

In order to enjoy the Flexi Fixed Deposit facility, you need to have a Savings Account in a bank that offers this facility and then open a Flexi Fixed Deposit manually, which will be then linked to your Savings Account. Now, in case if your Savings Account balance is insufficient for any deduction from your Savings Account, such as cheque clearance, withdrawal, etc. the deficit amount will get automatically transferred from your Flexi Fixed Deposit to your Savings Account.

For example, suppose you have a Savings Account balance of Rs 25,000. You open a Flexi Fixed Deposit of Rs 2 Lakhs with the same bank, which will be linked to your savings account. Now, you issue a cheque of Rs 50,000 to your vendor, but you do not have a sufficient balance in your account. In this case, Rs 25,000 will be transferred to your Savings Account and the cheque will be cleared, while the remaining amount of Rs 1,75,000 in your Flexi Fixed Deposit still continues earning the higher interest amount of a Fixed Deposit. However, some banks charge a penalty on the interest earned on a premature withdrawal.

What are the features of Flexi Fixed Deposit?

1. Flexible Deposit Tenure:

A Flexi Fixed Deposit offers the advantage of flexible tenure. So, you can choose the deposit tenure as per your financial objectives by staying invested as long as you want or can select tenure for a short duration. However, some banks have a minimum and maximum deposit tenure requirement, which you should check before availing of the facility.

2. Flexible Investment Amount:

You can choose any amount to invest in a Flexi Fixed Deposit. However, different banks have different criteria for a minimum balance requirement in their Savings Account to take advantage of this facility. Some banks even have a minimum and maximum amount limit to invest in a Flexi Fixed Deposit.

3. Higher Returns:

The Flexi Fixed Deposits offer a higher rate of interest, like Fixed Deposits. Hence, the returns are higher compared to the returns you would earn from Savings Account. The longer the period you stay invested, the more returns you will earn in future. Therefore, it is essential for you to avoid premature withdrawals.

4. High Liquidity:

You can prematurely withdraw the amount deposited in a Flexi Fixed Deposit. The premature withdrawal benefit offers the flexibility and convenience to withdraw money in case of an emergency, which is not possible with a traditional Fixed Deposit. Most banks offer you the Fixed Deposit interest rate for the period it was deposited, without any penalty. However, different banks have different rules for liquidity, which you should check before depositing your money.

5. Loan Against Flexi Fixed Deposit:

Similar to Loan Against Fixed Deposit, most banks offer Loan Against Flexi Fixed Deposit. So, if any financial emergency occurs, you do not have to liquidate your deposit. Instead, you can avail of a loan at an affordable rate of interest. Generally, banks charge 1% p.a. to 2% p.a. more interest than what they offer on the Fixed Deposit. So, if a bank is offering a 6.5% p.a. rate of interest on a Fixed Deposit for one year, they will offer a loan against it for 7.5% p.a. to 8.5% p.a. rate of interest.

6. No Additional Documents:

Banks offer the Flexi Fixed Deposit facility to their Savings account customers. Since the bank already has your KYC (Know Your Customer) details and documents, you do not have to submit them again, which makes the process quick and easy. However, if your Savings account is due for KYC, the bank can ask for the required KYC documents.

7. Auto-renewal:

You can give an instruction for automatic renewal of your Flexi Fixed Deposit. The auto-renewal lets your deposit renew automatically for the same period as soon as it is matured. This way you do not have to remember the maturity dates if you have multiple deposits and you do not lose any interest amount for not renewing them on time. This feature makes it attractive and hassle free for the account holders.

How is Flexi Fixed Deposit different from traditional Fixed Deposit?

Having a Savings Account is not mandatory to open a Fixed Deposit in banks. However, you need to follow the KYC policy of the bank. In normal Fixed Deposits, we invest a fixed sum for a fixed period to earn decent returns. The main difference between the two is that the traditional Fixed Deposit does not offer the flexibility to withdraw money prematurely. Although you can break the Fixed Deposit, but you cannot withdraw it partially. Furthermore, the bank charges you a penalty on the interest earned for the premature withdrawal of the Fixed Deposit. For example, if you open a Fixed Deposit of Rs 2 Lakhs in a bank for a period of one year, you will not be allowed to partially withdraw any amount from it. But, in case of an emergency, you can do a premature withdrawal of the full amount, for which the bank will charge you some penalty.

However, in the case of a Flexi Fixed Deposit, you can withdraw any amount from your deposits without any penalty, while the remaining amount continues as Flexi Fixed Deposit.

How is Flexi Fixed Deposit different from Auto-Sweep facility?

If you want to take benefit of the Auto-Sweep (sweep-in) facility, you need to have a Savings Bank Account. You can set a threshold limit in your Savings Account, any amount deposited above the threshold will automatically move to a fixed deposit and you can earn a higher rate of interest prevailing on the tenure that it remains with the bank. In case your Savings account balance is insufficient to clear your issued cheque then the deficit amount will be transferred from your Fixed Deposit to your Savings Account.

However, in the case of a Flexi Fixed Deposit, you manually have to open a Fixed Deposit and link it to your Savings account. Therefore, an Auto-Sweep facility is a convenient option if you are frequently going to deposit money into your Savings Account, which you would like to invest for a longer period for better returns.

For example, suppose you have set a threshold limit of Rs. 50,000 in your Savings bank account and have deposited Rs. 2,00,000 in the Savings account. Now Rs. 50,000 will remain in your Savings Account and Rs. 1,50,000 will automatically convert into a fixed deposit which will earn you a higher rate of interest. If you issue a cheque of Rs. 1,00,000 to a vendor and your Savings bank account has just Rs. 50,000 in the account then the deficit of Rs. 50,000 will be recovered from your fixed deposit.

To Conclude:

People always want to experience the things which are innovative and best for them. A Flexi Fixed Deposit is a better investment option if you are looking to set aside your contingency fund that you can easily withdraw in case of an emergency. Flexi Fixed Deposit offers you the flexibility and convenience as it is simple and hassle free. However, if you do not use the facility efficiently, you will not be able to earn good returns from it. Before investing your funds into a Flexi Fixed Deposit, it is advisable to check the rate of interest and product features of different banks to make an informed decision.

This article first appeared on PersonalFN here