Choosing Between Fixed and Floating Interest FD Options

Fixed Deposits, or FDs, are among the first options individuals consider to invest in a secure manner. But there is a choice that has investors wondering: whether to go for a fixed interest FD or a floating interest FD. Both choices come with their own advantages. What you choose should ideally depend on your financial goals. 

Let’s take a look at how each option works and when one might be a better fit for you than the other.

When Fixed Interest Makes More Sense

Let’s say you’re setting money aside for your child’s school fees, which are due in two years. You want to park your money somewhere safe. You’d rather know exactly how much you’ll get at the end of the tenure. In that case, a fixed interest FD is more suitable. It gives you clarity and peace of mind.

Fixed interest options work best when market FD interest rates are expected to drop or remain steady. By locking in your FD at a higher rate when interest rates are high, you make sure your returns remain steady even if the economy slows down later.

For example, in 2023, when the RBI raised interest rates steadily, many investors grabbed the opportunity to book long-term FDs at 7.5%–8%. That turned out to be a wise move for those who wanted to “lock and forget.”

When Floating Interest Can Be a Smarter Bet

Floating rate FDs are less common and not offered by all banks. But they come with a key advantage: your returns rise if the FD interest rates in the economy go up.

Suppose you believe that inflation will stay high for a while, prompting the RBI to increase policy rates further. In that scenario, a floating rate FD allows you to ride the upward trend. Your returns will increase in line with the benchmark, without you having to rebook your FD every time the rate changes.

Now, let’s say the current floating FD rate is 6.5%, and the repo rate goes up by 50 basis points in a few months. Your FD rate may also be revised to 7%, depending on your bank’s terms. This can add up to better earnings — provided the rate hikes continue.

Which One to Choose?

There’s no single right answer to this. But here are a few simple things to keep in mind to help you decide with ease:

• Your Financial Goals

If you require assured returns for a specific goal (such as wedding costs or a down payment), fixed rate FDs provide clearer visibility.

• Your Risk Tolerance

Floating rate FDs involve the risk of lower returns in case the market declines. If you find that uncomfortable, it’s wise to stick with a fixed interest option.

• Market Outlook

If experts predict that FD interest rates will increase in the coming 12–18 months, and you don’t need immediate liquidity, you can consider parking a portion in floating rate FDs.

• Investment Tenure

For longer durations, floating rate FDs could offer more upside potential. But for shorter time periods, fixed rates are more secure and easier to budget for.

A Balanced Approach

If you are still confused about which FD interest option to choose, you can follow what most seasoned investors do. They put a certain portion of their funds in fixed interest FDs for stability, while placing the remaining amount in floating FDs. This strategy is what allows them to benefit from any potential rise in interest rates.

Example:

Jai, a supply chain analyst in Bengaluru, receives a ₹5 lakh annual bonus and wants to invest it smartly with low risk. He splits the amount — ₹3 lakh into a 1-year fixed FD at 7.25%, which will earn him ₹16,875 in interest, and ₹2 lakh into a floating rate FD, hoping to gain if interest rates rise.

Tips to help you decide

• Read the details of floating rate FDs carefully. See how often the rate can change and what it depends on.
• Check the rules for premature withdrawals. You might get less interest if you break the FD before time.
• Keep taxes in mind. The interest you earn from both types of FDs is taxable, so consider this while planning.

Final Thoughts

Choosing between a fixed and floating FD is not just about guessing interest rates. It’s got more to do with picking what satisfies your goals, comfort level, and time frame. In the end, your money should grow in a way that feels right for you.