Indian stock market like the global stock market is unpredictable. There are hardly any safe investment instruments.
Investors who are risk-averse want to invest in risk-free instruments. They believe fixed deposits are the best instrument to invest. Fixed deposits are accepted by various types of entities in India.
But are the Fixed deposits really safe? Here I present some of the important facts you need to know before investing in fixed deposits.
RBI has made deposit insurance compulsory for FDs up to Rs 1 Lakh. Your investment in a bank is insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. This scheme covers your deposits up to Rs. 1 lakh for both principal and interest amount.
This is per bank (not per branch) per person. To eliminate risk, you may invest up to Rs 1 lakh in as many banks as you want and it will be covered under the insurance.
But as the history tells us RBI will not allow any nationalized bank to fail. Therefore, though the insurance is for Rs. 1 lakh, your FDs in nationalized banks are safe irrespective of the amount.
Private /Cooperative banks
The same is not true for private and cooperative banks. In these banks your FDs up to Rs. 1 lakh is insured. If the bank fails, it’s a risk you need to bear of you invest more than Rs. 1 lakh.
Though some of the leading private banks are strong banks and enjoy investors trust.
Post Office FDs
Post Office also accepts fixed deposits. You can invest in Post Office FDs. It is 100% safe as it is backed by the Govt guarantee.
The only issue is our post offices are neither tech-savvy nor customer experience savvy as banks. Be ready to bear some hardship while dealing with post offices.
Company / NBFC Fixed Deposits
This is by nature unsecured instruments. This is why they offer a higher rate of interest. The strength of the company is known by the credit rating the company enjoys. Better the credit rating lowers the interest and Vice a Versa. However, the recent incidences have put up a question mark on the credibility of credit ratings.
The operative word is: be cautious
The company fixed deposits are very risky. They offer no protection to the deposit holders.
The government passed the Banning of Unregulated Deposit Schemes Ordinance on 21 February 2019, prohibiting all deposit schemes (with or without interest) except those with regulatory approval.
So all unregulated deposits are banned. Those regulated companies accepting deposits are unsecured. Do not take risk of investing your hard-earned money with private companies for the lure of higher interest.
If you want to take a risk, invest in balanced mutual funds or debt funds. Mutual Fund managers’ risk management tools and capability is better than individual investors.
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Interest on fixed deposit is paid as per the investors’ preference i.e. quarterly, half-yearly, annually or on maturity.
Senior citizen gets a higher rate of interest.
The usual rate of interest varies from 4 % to 7%. Private companies offer interest up to 9 to 10%.
Loan Against FDs:
You can avail loan against FDs. Banks offer a certain percentage of loan against FDs. This could be a good option when you need money for the short-term and likely to be repaid.
Breaking FDs prematurely means loss of interest. Suppose you withdraw 24 months duration FD in 16 months. You get the rate of interest applicable to 16 months FDs and bank may levy extra changes. This way you lose interest.
By availing short term loan against your FDs which you think you can repay, you need not worry about less interest of penalty applicable in case of premature withdrawal.
Bank / Post Office FDs for 5 years and above gets tax benefits u/s 80C.
Interest on FDs is taxable but for senior citizen interest on FDs with Banks/Post Office is eligible for deduction up to Rs. 50,000/- u/s 80 TTB.
Fixed Deposits are a good investment option but be smart in choosing your option.
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“Risk comes from not knowing what you are doing.” Warren Buffet
All in all, be cautious with your money. A weak economy will make companies weaker. Do not get tempted to invest in fixed deposits for a higher rate of interest, opt for the safe option. Take risk where it is worth taking i.e. equity market not where you are looking for safety.
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