Looking to invest in a Bank FD and wondering about the risks associated with it? Read on to learn more about the same.

Fixed deposit 

Fixed deposits are one of the safest and most reliable investment options, issued by banks and NBFCs. When you invest in a fixed deposit, you start by depositing a certain amount of money with the said bank/NBFC at a pre-decided tenor and fixed rate of interest. The rate of interest applicable on NBFC or bank FDs varies from institution to institution.

Over the course of your chosen tenor, the interest on your deposit is compounded as per the applicable interest rate. Regardless of whether you invest in a bank FD or NBFC FD, the returns on your deposit are assured and unaffected by market fluctuations.

Features of a Bank FD

Both bank FDs and Corporate FDs have their own advantages. However, if you’re looking to invest in a bank fixed deposit, read on to know more about its features.

  • Guaranteed Returns: When investing in these financial instruments, you get the assurance of guaranteed returns. Unlike other investments, which fluctuate based on the market environment, Bank FDs offer fixed returns, as per the interest rate applicable at the time of investment.
  • Rate of Interest: While the interest rate offered on a Bank FD depends on your chosen tenor, it remains fixed throughout your investment term.
  • Flexible Tenor: When you invest in a Bank FD, you can choose from a flexible tenor ranging from 8 days to 10 years.
  • Return on Investment: In case of a Bank FD, the return on your investment is directly correlated to the tenor of the same. Higher the tenor, higher are your returns and vice-versa.
  • Loan Against FD: In case of urgent need for funds, you can choose to secure a loan against FD, instead of withdrawing from your FD prematurely. 

5 Risks Associated with bank FDs While most investors consider a Bank FD to be one of the safest instruments when it comes to investment, it is crucial that before investing in the same, you fully understand all risks associated with it. Given below are certain risks pertaining to bank FDs:

  • Risk Due to Liquidity: bank FDs are generally opted for by most investors owing to their higher rate of liquidity as compared to other financial instruments. It must be noted that this isn’t uniformly true across all bank FDs available in the market. For example, if you consider a tax-saver deposit, you need to invest for at least 5 years. Thus, you may not be able to liquidate your funds before maturity. In addition, you may not always be able to liquidate your bank FD online. You will need to visit the nearest bank branch and complete the necessary documentation to process the same. 
  • Risk of Default: Although bank FDs are usually considered safe investment options, there are multiple instances from the past wherein banks have defaulted on payments. To mitigate this risk, the Reserve Bank of India has issued some updated guidelines. The investor is liable to receive insurance on their bank FD, for an amount of up to ₹5 Lakhs, over and above which your investment risks a default.
  • Risk of Inflation: Irrespective of the type of investment, inflation is a metric that influences the value of the same. For example, a bank FD offers an interest rate of 7%, while the prevailing inflation rate stands at 4%. Then, under such circumstances, the rate of return that you actually receive on your investment will be lower than the inflation rate. Thus, the returns you accrue on your deposit will not help you beat the prevalent inflation rates. 
  • Risk of High Taxation: When it comes to a bank FD, senior citizens (those over the age of 60) can avail tax benefits under Section 80 TTB. However, if you as an investor do not fall into this age bracket, the rate of return applicable on your bank FD will vary on the basis of the tax slab that is applicable to you.
  • Risk of Reinvestment: Upon maturity of a bank FD, you have the option to receive your total payout or to renew your deposit. However, if you decide to choose the latter, your FD will be subject to the prevailing rate of interest in the market. If the prevailing rate is low, the renewal of your bank FD could hamper your investment goals. 

Conclusion

Now that we have shed light on the features and risks associated with a bank FD, make sure to conduct adequate research before making an investment of your choice. Before investing in FD, you can determine your returns beforehand by using a fixed deposit calculator. If you’re looking for a mix of high-risk and low-risk investment portfolio, consider investing a portion of your savings in a fixed deposit to balance your returns. You can choose the tenor and payout frequency, based on your investment goals.

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