Let me tell you a story. Long long ago, so long ago, noone knows how long ago - I opened a fixed deposit. Not sure why I needed to or what I was thinking, but I did it for 180 days. It was with HDFC Bank and I opened it online. Then promptly forgot about it.
Fast forward a few years (I don't really know,or want to know, how many years - refer the second sentence on this blog)...
Some conversation about recent interest rate hikes by RBI made me review what rates my FDs were locked in at. And what i found was quite sad - given I claimed to be on top of everything personal finance.
Turns out the default setting of FD opening is to renew on maturity. And my 6 month FD at some really pathetic rate had gone into the infinte loop of maturity. One may argue that it was still okay, but think about what I lost in terms of interest over that period of time, given I never actually took the money out after 6 months. Here is a simple example to illustrate my stupidity.
INR 1 Lakh invested on 1 Jan 2020 for 6 months was at 5.8% p.a interest rate and auto renewed on 3 July at 4.5% p.a. interest rate.
Had I thought it out more, I would have locked it in for 12 months at 6.3% on 1 Jan 2020.
On 3 Jan 2021, I had a notional loss of 23% i.e I could have made 23% more interest than what I actually ended up making due to the auto renewal
Of course, I could argue that I didn't know interest rates would fall etc etc. (And I did argue successfully against myself to make myself feel less of an idiot).
Does this mean we should lock in for the highest possible rate? Not really. My learning has been to take each renewal individually. When the FD is liquidated, I am forced to relook at my options to deploy. Also, the rate regime changes depending on what is happening in the big bad world. For e.g. till October 2022, HDFC bank had the same rate for 1 year to 2 years. In October, HDFC Bank introduced higher rates for 15 month deposits. So all my One year Auto renewals are now making lesser over 3 years than a 15 month auto renewal will.
Moral of the story: Switch off auto renewal even on your existing FDs. Take the time (maybe 5-10mins) to deploy funds in the best tenure, or even to redeploy to other avenues. Else your FDs are in an infinite loop earning lesser than they could have with just some minimal effort!
Do you have (any) Fixed deposits in Auto Renewal Mode?
Yep!
Nope!