A fixed deposit (FD) is a popular investment avenue offered by banks and financial institutions where you invest a lump sum amount for a predefined tenure to earn interest. Top-Up FDs are a variant of traditional FDs that allow you the flexibility and convenience to invest additional sums during the FD tenure. In this article, we’ll learn what Top-Up FDs are, how they work and the key benefits they offer compared to regular FDs.
What is a Top-Up Fixed Deposit?
A Top-Up FD is very similar to a traditional fixed deposit with one key difference – it allows you to add more funds on top of your initial deposit during the FD tenure. For example, if you opened a 1-year FD with an initial investment of ₹1 lakh, a Top-Up FD will allow you to invest more amounts like ₹20,000, ₹30,000, etc., over the next 11 months.
The additional money you invest will also earn interest as per the original FD interest rate and tenure. The interest rate is not impacted by the staggered investments. You can easily track how your investment is growing using a fixed deposit calculator, which helps you see the impact of your additional deposits on your overall returns. Top-up FD is a good way to invest small amounts regularly and maximise compounding returns.
How Does a Top-Up FD Work?
Here is a quick 5-step process to open a Top-Up FD:
- Open a Top-Up FD just like a regular FD with an investment amount and lock-in period.
- The bank will indicate the maximum amount you can add during the FD tenure.
- As per your financial plans, keep investing additional amounts up to the maximum limit into your Top-Up FD.
- The bank will issue an updated FD certificate whenever you top up with added principal.
- At maturity, the principal and interest from the original FD, plus all top-ups, are paid out.
Benefits of Top-Up Fixed Deposits
Here are the major benefits of Top-Up FDs over regular FDs:
- Convenience of Adding Funds
The key benefit of Top-Up FDs is the flexibility to invest as per your financial capacity. You can add small amounts regularly instead of making a big one-time investment. This flexibility is ideal for individuals who manage multiple investments, such as those also holding a demat account or zero brokerage account, allowing them to allocate funds across different financial products without strain.
- Compound Growth
Since the incremental amounts also earn interest, the compounding effect boosts returns, leading to higher maturity proceeds.
- Competitive Interest Rates
Banks offer the same interest rate on Top-up FDs as regular FDs. So, your subsequent investments also earn equivalent returns.
- Liquidity
You can opt to receive interest payouts periodically while keeping the principal locked in to take advantage of the rate.
- Tax Benefits
The overall interest you earn is taxable according to income tax rules, so it offers the same tax advantage as FDs.
- Safe Investment Option
As a deposit with banks, a Top-up FD offers the safety of capital, so it helps achieve financial goals without risk.
Factors to Consider When Selecting the Best Top-Up FD
While Top-Up FDs offer flexibility and improved returns, do compare the offerings across banks based on:
➔ Interest rates: Choose the bank that offers the highest rate for your preferred tenure
➔ Top-up flexibility: Frequency and limits for incremental deposits
➔ Minimum and Maximum tenure: Align tenure as per goal
➔ Withdrawal options: Liquidity as per need
The Bottom Line
Top-up fixed Deposits are a versatile investment option that offers instant liquidity, the ability to invest small amounts regularly, and the benefit of compounding interest. For short-term financial goals, Top-up FDs can be the ideal savings tool to grow your money safely and efficiently. Compare options and invest wisely.