Fixed Deposits are certainly one of the top choices for most of us Indians when it comes to saving our hard-earned money. According to BankBazaar, an FD account always provides a better interest rate than a regular savings account. Investors can "fix" their deposits for a few days or as long as 10 years, with better returns than the average savings account. But for those, who seek the security that an FD provides, but also want to enjoy certain flexibilities, Linked FDs are something worth considering.
As the name suggests, a Linked FD is linked to your savings account. The system works on the principle of "sweep in-sweep out" of the FD account meaning, any amount over a certain level is automatically transferred back into the FD account. Usually, the tenure of an FD is one year. The current scheme rate is applied on the day of an auto sweep.
Ajit Narasimhan, Category Head - Savings and Investments at BankBazaar.com, explains, "If there is any shortfall in the funds lying in the savings account to meet an application withdrawal then a portion of the FD—just enough to cover such shortfall—is automatically withdrawn in multiples of Rs 1000 or another amount as set by the bank." He also stated that the original interest rate is applied to the remaining balance in the FD to offer a higher interest rate.
How it works:
The linked FD allows customers to earn higher returns on their savings account balances by letting their money be in flexible fixed deposits but not at the cost of liquidity. For instance, consider Rs 1,00,000 lying in a savings account. It fetches an average annual interest of 3-4% and is always available. The same amount, on the other hand, if put in an FD will generate better interest for a person but will not be liquid until the date of maturity. So, the linked FD automatically transfers idle money lying in the savings account to an FD, thus maximizing interest earnings but also keeping the money quite easily accessible.
Many banks provide this linking service free of cost, while others charge for it. The bank, however, decides upon how much will be the maximum amount in the savings account and how much can be swept out of it. If under these conditions, it does not suit your requirements, then it's better to look elsewhere, advises Narasimhan.
