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The past 2 years, the Fixed Deposit rates were very low (~5.1 - 5.2 roi for 1-2 years) during which I had created multiple fixed deposits. However, with the rates on the rise now (6.75 for 1-3 years), I am trying to evaluate if it would be a good idea to liquidate my lower roi FDs and open new ones to maximise the returns I get. Some of the FD and liquidation details are as below:

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Can you please help me understand how to decide if I should liquidate (some or all of) the FDs?

Follow-up question: At what ROI would the liquidation become beneficial?

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  • Some are close enough to maturity, and for others the increase of s not substantial enough that I would “rate chase”. Heck… FD #1 is maturing next month, and others in March!!
    – RonJohn
    Commented Jan 7, 2023 at 20:52
  • @RonJohn: Agreed. Ignoring the January to March, what about the rest ? Do you think there will be a difference ?
    – user96551
    Commented Jan 9, 2023 at 7:12
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    It depends on the penalty for early withdrawal. At my US bank, there's a 2 month interest penalty for CDs (very similar to FD) less than 2 years in length. I used to rate chase, but have decided that it's too much effort for too little gain, since my CDs are pretty short term. However, if I'd opened a 5 year CD last year at 0.6%, I'd definitely eat the 5 month penalty to open a 4.15% CDs.
    – RonJohn
    Commented Jan 9, 2023 at 18:17

2 Answers 2

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Compare the interest amount foregone for the remaining term of FD with the new interest amount at the new interest rate on the new principal amount for that remaining term.
Interest foregone = Total interest for the full term - Net interest given by the bank for the elapsed term. New principal amount = Original principal + Net interest given by the bank for the elapsed term - TDS

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    This assumes no penalty for early withdrawal, which is unlikely. These are fixed term deposits; if customers could freely walk away with no penalty under a rate increase, then you'd get to have your cake and eat it too.
    – Grade 'Eh' Bacon
    Commented Jan 10, 2023 at 19:09
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    @Grade'Eh'Bacon: Isn't that what column [d] is? OP subtracts that to get the Final Payable (column [e]).
    – user96551
    Commented Jan 10, 2023 at 19:59
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Check very carefully the rules for early withdrawal.

Some investments are traded at a market rate. Say you invested $10,000 for 2 years at 5.0% interest rate. Obviously you will get two interest payments of $500 plus your $10,000 back after two years. But if you try to sell this investment, you don't get $10,000 plus interest, you get the current market price plus interest.

If the interest rate stayed 5.0%, the market rate will remain $10,000. If after a year the interest rate is 6%, then you can expect $500 interest for the next year, while a new investment would get $600. So nobody in their right mind will give you $10,000 for your investment, they will give you $9,900. On the other hand, if interest rates dropped to 4%, then a new investment will pay only $400 interest in a year, so people will be willing to give you $10,100 for your investment which pays $100 more interest.

In the end, you have to calculate what you will get for your old investment, and which interest rate a new investment would pay, and act accordingly.

But also longer investments tend to pay higher interest rates. So if you have a five year investment and sell it after two years, the bank won't be willing to pay you the higher rate that was reserved for "five-year" customers, so there will be a penalty in your contract that you will have to pay to get your money back early.

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  • The OP is talking about Fixed Deposits (FDs) which are not trade-able to third parties, but can only be redeemed at the bank which will apply its rules for premature withdrawal. These rules may include a penalty and/or a re-computation of interest at lower rate and clawing back some part of the interest already paid. So, the proceeds of the premature withdrawal might well be less than the principal amount.
    – Dilip Sarwate
    Commented Nov 3 at 16:56

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