What is a floating rate fixed deposit and how does it impact your investment?

Fixed deposit is nothing but an investment plan offered by banking and non-banking institutions with a motto to save money for a long period. As the name suggests, the tenure for this avenue is fixed horizon. Some of the benefits of investing in fixed deposits include no risk, attaining interest income, returns guaranteed, etc. Now, the interest rate on fixed deposits is either fixed or floating. 

What is floating rate fixed deposits?

Floating-rate fixed deposits come under the umbrella of fixed deposits. This rate is not stable for the whole fiscal year and keeps altering frequently. Investors and customers can take advantage of the interest rate fluctuations to gain more as opposed to fixed deposit investments.

Any interest gained on floating rate deposits is paid at the end of every quarter. The unitholder can nominate anyone without paying any charges. The initial amount to start FRFD is INR 10,000, and the maximum is below INR 1 Crore. The time period and the investment amount are stable, but the rates keep swinging.

The floating rate is linked to a reference rate and moves along those lines. The minimum lock-in period for this investment is one year. Senior citizens benefit highly from this model, as they’ll be getting interest rates above 50 basis points, and beyond the usually fixed deposit schemes.

How do floating rates impact your investment?

As you know, floating rates differ often, which again, is a plus for customers who want to gain some extra income when interest rates surge. Besides, it also creates a window of opportunity for a customer or investor, making it an appealing investment choice. The floating rate fixed deposit investment is ideal for short-term investors because, in the long run, there’s a higher probability that these rates would plummet.

There are many reasons why banks find it arduous to hold deposits for the long term. Some of them include a plunge in borrowing and lending rates, high-interest rates offered on savings, economic crisis conditions, availability of more funds but less demand, etc. The aforementioned factors impact the floating rates, resulting in reduced returns.