Understanding liquidity – How to enhance liquidity in FDs?

Understanding liquidity – How to enhance liquidity in FDs?

08 February 2024 | By INDIE

Fixed deposits (FDs) have always been a secure and predictable investment option for risk-averse investors. However, understanding liquidity in finance can be critical for sound financial planning. The liquidity of an investment refers to how fast and readily an investment may be changed into cash without influencing its value considerably. Being able to have investment liquidity is critical because it gives retail investors flexibility and security, especially during financial emergencies.

Market liquidity (the ease with which an asset may be traded in the market), liquidity through funds (rapid access to money on short notice), and cash liquidity (the availability of cash or cash equivalents) are all different types of liquidity. The capacity to withdraw cash from a savings bank account or sell assets such as stocks is an example of liquidity.

Now, let's look at ways to improve liquidity in FDs –

Ladder your FDs

This entails dividing your investment into many FDs with varying maturity dates. By having FDs maturing at different times, you create a continuous cycle of funds becoming available which helps with ensuring liquidity, providing a financial safety net throughout the year.

Opt for FDs with shorter tenures

Opening a fixed deposit account with a shorter maturity time can help you increase your liquidity. While these FDs may offer lower interest rates as compared to the FDs with longer terms, easier access to cash can be a worthwhile trade-off. This adaptability is especially beneficial for people who require funds for short-term goals or unanticipated bills.

Exercise the option of partially withdrawing funds

Some FDs allow partial withdrawals, permitting investors to take a portion of the FD amount in the event of a financial emergency, assuring liquidity without disrupting the full investment. This function comes in handy during unanticipated events, allowing you to access cash while leaving the rest of your investment intact and growing.

Use the overdraft facility against your FD

Many banks provide an overdraft facility in exchange for FDs. This implies that you can borrow a percentage of your FD amount to ensure liquidity without breaching the FD. This function is very useful for dealing with short-term financial shortages while keeping your FD investment intact.

Consider opening a Flexi FD

Flexi fixed deposits are a mix of savings and fixed deposit accounts that provide the high interest rate of FDs while also offering the liquidity of savings accounts. Whenever your savings account balance runs low, you can pay directly from the funds in your FD and manage all your expenses seamlessly. This hybrid approach is appropriate for people who want the growth of fixed deposits without sacrificing liquidity.

Rely on the auto sweep facility

This facility links your savings account with your FD. You can set a threshold for your savings account balance and whenever funds exceed that threshold, they are automatically converted into an FD. You get to enjoy a higher interest rate on your surplus funds and maximise your savings.

Finally, while fixed deposit account are a safe and stable investment alternative, increasing their liquidity may greatly increase their appeal. The flexibility to access funds when needed, combined with the security of stable returns, makes FDs a compelling choice. Linking your fixed deposit to your savings account for direct payments when the savings balance is low further adds to the practicality of FDs. Thus, for those seeking a balance of safety, returns, and liquidity, fixed deposits, especially with enhanced liquidity options, present an attractive avenue.

If you are looking for a fixed deposit that offers one of the best interest rates in the market, consider IndusInd Bank’s INDIE since you can get a fixed deposit interest rate of up to 7.75% per annum. With INDIE, you can also enjoy the auto sweep facility to convert excess savings account balance into FDs, and the convenience of starting an FD with as low as Rs. 1000.

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.