What are Floating Rate Fixed Deposits | AU Small Finance Bank
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What are Floating Rate Fixed Deposits

    Fixed Deposits (FDs) are a preferred choice for individuals looking to grow their savings while maintaining capital protection. Traditional FDs offer fixed interest rates over the entire tenure of the deposit. However, Floating Rate Fixed Deposits (FRFDs) provide an alternative that allows investors to benefit from interest rates that can change over time. In this blog, we'll explore the concept of Floating Rate Fixed Deposits and understand how they work, their advantages, and factors to consider when investing in them.

     

    What Is Floating Rate Fixed Deposits?

    Floating Rate Fixed Deposits, as the name suggests, are FDs where the interest rate is not fixed but varies based on specific market benchmarks or external factors. The interest rate can fluctuate at regular intervals, often linked to an external benchmark like the Reserve Bank of India's repo rate or the government's savings bond rate. This means that the interest rate on your FRFD can go up or down during the deposit's tenure.

     

    How Do Floating Rate Fixed Deposits Work?

    1. Benchmark Linkage: FRFDs are linked to an external benchmark rate. The interest rate on the FD is set as a certain percentage over or under this benchmark rate.
    2. Interest Rate Adjustment: When the benchmark rate changes, the interest rate on the FRFD is adjusted accordingly. If the benchmark rate goes up, the interest rate on your FRFD increases, and if the benchmark rate falls, your interest rate decreases.
    3. Regular Reviews: Most FRFDs have periodic reviews, such as quarterly, half-yearly, or annual reviews, where the interest rate may be revised based on the benchmark rate at that time.
    4. Minimum and Maximum Limits: FRFDs typically have a specified floor (minimum) and ceiling (maximum) interest rate. This provides some level of interest rate stability for investors.
     

    Advantages of Floating Rate Fixed Deposits

    1. Protection Against Inflation: FRFDs can offer better protection against inflation because the interest rate can rise with increasing inflation, potentially providing higher returns.
    2. Market-Linked Returns: FRFDs allow investors to benefit from market-linked returns without directly investing in equities or other riskier assets.
    3. Rate Hike Benefits: When benchmark interest rates rise, FRFD investors can enjoy higher returns, potentially outperforming traditional FDs during such periods.
    4. Interest Rate Diversification: Including FRFDs in your investment portfolio can diversify your interest rate risk and provide balance.
     

    Considerations when investing in FRFDs

    1. Interest Rate Trends: Stay informed about the benchmark interest rate trends and consider investing in FRFDs during periods of expected rate increases.
    2. Liquidity Needs: FRFDs may have restrictions on premature withdrawals or require you to maintain a minimum balance. Ensure they align with your liquidity needs.
    3. Floor and Ceiling Rates: Understand the minimum and maximum interest rates on the FRFD to gauge the level of risk and potential returns.
    4. Penalties for Early Withdrawals: Be aware of any penalties or reduced interest rates for early withdrawals.
    5. Review Frequency: Different banks may have varying review frequencies for interest rate adjustments. Choose an FRFD that aligns with your preference.
     

    Conclusion

    Floating Rate Fixed Deposits offer investors the opportunity to benefit from market-linked returns and protection against inflation. They can be a valuable addition to a diversified investment portfolio. However, like any financial product, it's essential to consider your financial goals, risk tolerance, and market conditions before investing in FRFDs. Regularly monitoring interest rate trends and the specific terms and conditions of the FRFD will help you make the most of this investment option while managing potential risks.


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