3. Premature Withdrawals Invite A Penalty
Make sure you get the term right while investing in a FD. Engaging the money for a long term and then making a premature withdrawal will only fetch you lower returns. If your bank or financial institutions offers you a 9 percent interest on 1-year term, and 9.5 percent for a 5-year deposit, then don't get attracted to opt for the longer term. What if you need the money earlier?
If you go for the 5-year FD and happen to break it after 1 year, you will get the rate applicable for the 1-year deposit. But in worse case, you may have to pay a premature withdrawal penalty which will lower the rate by 1 percent. So, rather than gaining half a percent, you may end up losing 1 percent. To avoid this, you must go for the ladder system.
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