Not only Fixed Deposits, 'linked FDs' are a good option too

Fixed Deposits (FDs) are dear to each Indian who is looking to save some of their hard-earned money. 

According to BankBazaar, a fixed deposit account is a financial instrument which offers an interest rate higher than that of a savings account. Investors can "fix" their deposits for a period ranging from a few days to 10 years and earn higher than 'average savings account' returns. 

However, if you want to stick with fixed deposits, here is one more variant which will give you give you benefits of both saving account and a FD. 

Enter, Linked Fixed Deposits. 

As the name suggests, Linked FD links your savings account to your fixed deposit. 

It has an auto sweep-in–sweep-out facility where in any amount above a specific threshold is automatically converted to an FD. 

The term of the FD is usually one year and the interest rate on FD would be the prevalent rate on the day of the auto sweep.

Explaining the scheme, Ajit Narasimhan, Category Head - Savings and Investments, BankBazaar.com, said, "In case the funds in the savings account fall short to cover any withdrawals, a part of the FD – as much as required to meet the shortfall – is automatically withdrawn in multiples of Rs 1000 (or any other amount set by the bank). The remaining balance in the FD continues to earn higher interest at the original rate applicable to FDs."

How does it work?

The linked FD essentially allows customers to save their money lying in savings accounts in flexible fixed deposits, enabling them to earn a higher interest rate without compromising on the liquidity. 

For instance, if you have Rs 1,00,000 in your savings account, it would generate an interest of 3-4% per year on an average, however, you could access it any time you need it. If you locked it in an FD, you would earn a higher interest rate, however, the money would not be accessible until the maturity of the FD. 

Linked FDs provide you the best of both by providing you a higher interest rate as well as liquidity.

Many banks provide this kind of linking free of cost, however, others may have an associated fees. Also, the maximum amount retained in the savings account and the swipe out amounts are fixed by the bank. If these do not match your requirements, you may want to look at other options, Narasimhan explained.