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What is Floating Rate Fixed Deposit?

mahindra-finance-author

by Mahindra Finance

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March 5, 2024

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4 mins read

Are you looking for a safe and reliable investment option that offers flexibility and the potential for higher returns? If so, a floating rate fixed deposit might be the right choice for you. In this article, we will demystify the concept of floating-rate fixed deposits and provide you with practical guidance on how to make the most of this investment avenue.

Floating-rate fixed deposits are an attractive financial instrument that allows individuals to earn interest on their savings while enjoying the benefits of flexible interest rates. But what exactly does it mean when we talk about floating rates? Let's dive deeper into this topic to gain a better understanding.

Understanding floating rates: The basics

A floating rate of interest is an interest rate that changes periodically based on market conditions or specific benchmarks. Unlike fixed interest rates, which remain constant throughout the loan tenure or investment period, floating rates fluctuate in line with economic factors such as inflation or changes in key lending rates.

For example, if you opt for a floating fixed deposit with an initial interest rate of 7%, your returns may increase or decrease depending on market conditions. This means that your interest earnings will vary from year to year, providing the potential for higher returns when market conditions are favorable.

It's important to note that the benchmark used to determine floating rates varies depending on the financial institution and the type of investment product. Common benchmarks include the London Interbank Offered Rate (LIBOR), federal funds rate, or prime rate.

Benefits of floating rate fixed deposits

  • Flexibility: One of the key advantages of floating rate fixed deposits is their flexibility. As interest rates change, your returns can increase or decrease, giving you the opportunity to earn higher interest during periods of economic growth.
  • Potential for higher returns: Floating rate fixed deposits have the potential to offer higher returns compared to traditional fixed-rate deposits. When interest rates rise, your earnings from the deposit can increase, allowing you to capitalise on market conditions.
  • Hedge against inflation: Inflation erodes the purchasing power of money over time. Floating rate fixed deposits can act as a hedge against inflation by providing higher returns during periods of rising prices.
  • Liquidity: While fixed deposits are known for their lock-in periods, floating rate FD often come with shorter tenures and more flexible withdrawal options. This means that you can access your funds when needed without incurring heavy penalties.

Calculating Returns on Floating Rate Fixed Deposits

Calculating the potential returns on a floating rate fixed deposit requires an understanding of how FD interest rates are determined and how they affect your investment earnings. Here's a step-by-step guide:

  • Step 1: Determine the benchmark rate: Find out which benchmark rate is used by the financial institution to determine the floating rate of interest for your deposit.
  • Step 2: Identify the margin or spread: The financial institution will add a certain percentage (margin) to the benchmark rate to calculate your final interest rate.
  • Step 3: Calculate annual interest earnings: Multiply your deposit amount by the final interest rate to calculate your annual interest earnings.
  • Step 4: Consider compounding frequency: If the floating rate fixed deposit offers compounding, take into account how frequently the interest is compounded (e.g., quarterly, semi-annually, annually).
  • Step 5: Repeat for each year of investment: Repeat steps 3 and 4 for each year of your investment tenure to calculate your total returns at maturity.

Conclusion

Floating rate fixed deposits provide Indian investors with an excellent opportunity to earn higher returns while enjoying the flexibility of changing interest rates. By understanding how these investments work, calculating potential FD returns, and considering their benefits and risks, you can make informed decisions about your financial future.

As you explore different investment options, consider Mahindra Finance as a trusted partner in your financial journey. With wide range of financial products and personalised solutions tailored to meet your specific needs, we can help you navigate the world of investments and secure your financial goals. Remember, knowledge is power when it comes to making informed financial decisions!

FAQs

Q: What is the difference between floating rate fixed deposits and regular fixed deposits?

Regular fixed deposits offer a fixed interest rate throughout the investment period, while floating rate fixed deposits have interest rates that change periodically based on market conditions or benchmark rates.

Q: Are floating rate fixed deposits suitable for risk-averse investors?

Floating rate fixed deposits can be a suitable option for risk-averse investors as they offer stability and potential for higher returns compared to regular fixed deposits.

Q: Can I withdraw my funds from a floating rate fixed deposit before maturity?

Yes, most floating rate fixed deposits offer some degree of liquidity, allowing you to withdraw funds before maturity. However, it's essential to check the terms and conditions set by the financial institution.

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