Difference Between Callable And Non-Callable Fixed Deposit

When it comes to investing in fixed deposits (FDs), you may come across terms like “callable” and “non-callable”. But what exactly do these mean, and how do they impact your investment decisions? In this article, we’ll dive deep into the differences between callable and non-callable FDs, helping you make an informed choice based on your financial goals and risk appetite. We’ll explore the unique characteristics of each type, compare interest rates, and provide real-life examples to illustrate the pros and cons.

Understanding Callable and Non-Callable FDs

What is a Callable Fixed Deposit?
A callable fixed deposit is a type of FD that allows the issuer, typically a bank or financial institution, to “call back” or redeem the deposit before its maturity date. This means that the issuer has the right to return your principal along with the accrued interest up to that point, even if the original tenure hasn’t ended.

Liquidity and Flexibility
One of the main advantages of callable FDs is the liquidity they offer. As an investor, you have the flexibility to withdraw your funds prematurely if needed, although this may come with a penalty. For example, if you invest in a 5-year callable FD but need the money after 3 years, you can break the FD and access your funds.

Interest Rates
Callable FDs generally offer lower interest rates compared to their non-callable counterparts. This is because the issuer has the option to redeem the deposit early if market interest rates fall, allowing them to borrow funds at a lower cost. For instance, Airtel Finance offers competitive interest rates on its callable fixed deposits.

What is a Non-Callable Fixed Deposit?
A non-callable fixed deposit, as the name suggests, does not give the issuer the right to redeem the deposit before its maturity date. Once you invest in a non-callable FD, your funds are locked in for the entire tenure, and the issuer cannot return your money prematurely.

Higher Interest Rates
Since non-callable FDs do not provide the early redemption option to the issuer, they typically offer higher interest rates compared to callable FDs. This is because the issuer is assured of having access to your funds for the full tenure, allowing them to invest in longer-term projects and offer better returns.

Minimum Investment Amount
Non-callable FDs often come with a higher minimum investment requirement compared to callable FDs. For example, Airtel Finance requires a minimum deposit of ₹10,000 for its non-callable fixed deposit.

Comparing Callable and Non-Callable FDs

Interest Rate Comparison
Let’s take a look at a simple example to understand the difference in interest rates between callable and non-callable FDs:

As you can see, non-callable FDs offer a higher interest rate for the same tenure compared to callable FDs.

Liquidity and Premature Withdrawal

While callable FDs provide the flexibility of premature withdrawal, non-callable FDs do not allow this option. However, in case of emergencies, some banks may allow premature withdrawal of non-callable FDs, subject to certain conditions and penalties.

For instance, if you have a 5-year non-callable FD of ₹5 lakh with Airtel Finance and you need to withdraw the funds after 3 years, the bank may levy a penalty of 1% on the interest rate. So, instead of earning 7.50% interest, you may end up getting 6.50% due to the premature withdrawal.

Choosing Between Callable and Non-Callable FDs

Assessing Your Financial Goals
When deciding between callable and non-callable FDs, it’s essential to consider your financial goals and liquidity requirements. If you have a short-term goal and may need the funds before the maturity date, a callable FD might be a better choice. However, if you have a long-term investment horizon and don’t foresee any immediate need for the funds, a non-callable FD can help you earn higher returns.

Risk Appetite and Market Outlook
Your risk appetite and market outlook also play a crucial role in choosing between callable and non-callable FDs. If you believe that interest rates are likely to fall in the future, investing in a non-callable FD can help you lock in the current higher rates. On the other hand, if you anticipate a rise in interest rates, a callable FD may be a better option, as you can reinvest the funds at higher rates if the FD is called back by the issuer.

Diversifying Your Portfolio
As with any investment, it’s wise to diversify your portfolio to manage risk. You can consider investing in a mix of callable and non-callable FDs based on your financial goals, risk appetite, and market outlook. This way, you can balance the benefits of liquidity and higher returns while minimizing the impact of interest rate fluctuations.

Conclusion:

Understanding the difference between callable and non-callable fixed deposits is crucial for making informed investment decisions. While callable FDs offer liquidity and flexibility, non-callable FDs provide higher interest rates and a guaranteed return on investment. By assessing your financial goals, risk appetite, and market outlook, you can choose the type of FD that best suits your needs.

If you’re looking to invest in a fixed deposit, Airtel Finance offers a range of callable and non-callable FD options with competitive interest rates. You can easily calculate your potential returns using their online FD interest calculator and make an informed decision. Remember, investing in an FD is a smart way to grow your savings and achieve your financial goals. So, start exploring your options today and take a step towards a secure financial future with Airtel Finance.

FAQs:

1. What is the difference between callable and non-callable FD?
   A callable FD allows the issuer to redeem the deposit before maturity, while a non-callable FD does not provide this option. Callable FDs offer liquidity but lower interest rates, while non-callable FDs provide higher returns but lock in funds until maturity.

2. Can non-callable FD be withdrawn?
   Typically, non-callable FDs cannot be withdrawn before maturity. However, in case of emergencies, some banks may allow premature withdrawal subject to certain conditions and penalties.

3. What is the RBI guideline for non-callable FD?
   As per RBI guidelines, non-callable FDs have a minimum tenure of 46 days. Banks are required to inform customers about the non-callable nature of the FD and the applicable terms and conditions.

4. What is the disadvantage of callable bond?
   The main disadvantage of a callable bond or FD is that the issuer can redeem it before maturity if interest rates fall, depriving the investor of the opportunity to earn higher returns for the full tenure.

5. Which is better, callable or non-callable?
   The choice between callable and non-callable FDs depends on your financial goals, risk appetite, and market outlook. Callable FDs offer liquidity, while non-callable FDs provide higher returns. It’s advisable to diversify your portfolio with a mix of both based on your specific needs.