Getting your excess savings invested rather than leaving them futile is a smart move. In the financial market landscape, you might find an array of options for investment. However, the fixed deposit remains the popular choice because they assure guaranteed returns of the principal amount along with the interest rate irrespective of any changes in the card rate. It is a reliable way to increase savings with the utmost security.
However, before you start investing in fixed deposits, you must evaluate all the risk factors and decide if fixed deposits are the safest investment option for you.
The safety factors of FD investment
Capital Safety
The main reason for the popularity of fixed deposits as an investment option is because of its twin safety. Fixed deposits in banks come with capital protection and income certainty, which turns out to be the main USP of the scheme. The PSUs and large private sector banks are considered more trustworthy in terms of capital protection.
It is essential to check the categorization of the banks defined by RBI. All the banks that are listed under the deposit insurance plan of DICGC come with the security of built-in insurance. The depositors are eligible to get insurance coverage of up to Rs. 5 lakhs with cumulative deposit schemes like a savings account, fixed deposits, current deposits and recurring deposit schemes under each scheduled bank.
Regulation by RBI
If you have invested in a fixed deposit with a bank, it is more likely to be safe. This is because the custodian bank i.e., RBI has made deposit insurance mandatory for all banks. Both the principal amount and interest rate will get coverage of Rs. 1 lakh under the Deposit Insurance and Credit Guarantee Corporation or the DICGC scheme. The funds will be secured even if the bank goes through insolvency.
Some NBFCs and financial companies usually offer a higher interest rate which can convince the investors to grow significantly. However, depositors need to be extra cautious when parking money with private players. If you are planning to go with the NBFCs, it is advisable to check their credit ratings and financial stability as these do not come under the purview of scheduled banks.
Assured returns
When you opt for an FD the rate of interest remains the same throughout the tenure. It means your fixed investment continues to accrue interest at the same rate. Any turbulence in the market does not affect the interest rates of your fixed deposit investments. Even if the fixed deposit interest rate offered by your respective lender goes south, the interest rate of your fixed deposit will not follow the decree.
Despite the security of the returns, there may be some concern regarding the FD returns. Longer tenure tends to fetch greater interest than shorter tenure and hence, FDs with longer-tenure seems to be the better option. However, you cannot ignore the short term financial requirements. In such a scenario, instead of going for any high-risk investment for higher returns, you can divide your investments in both short term and long term FDs. This move will allow you to enjoy the benefits of both tenures without causing much risk.
The risk factors of FD investment
Interest risk
The capital invested in a fixed deposit stays locked at the same interest rate for a long time. If the interest rate in the market increases, your investment will not be eligible for any benefits.
Inflation risk
Fixed deposits have the risk of inflation due to its fixed interest rate for a long tenure. The value of the returns at maturity may seem lower than the original investment value.
Liquidity risk
Liquidity becomes a matter of concern in terms of fixed deposits. Most fixed deposit providers offer pre-closure, however, after charging the pre-closure fee and penalty. Hence, you may end up losing your portion of your returns. Furthermore, you can not get access to tax saver FDs before 5 years.
It is a wise idea to diversify the investment portfolio of fixed deposit schemes to get more stability and security. In addition to the safety and fixed returns, FD can be used to avail loans at the time of financial emergencies. A fixed deposit is by far the most reliable means to grow your savings. However, you must remember the chances of low earning besides the security of assured returns.
Reference:
https://www.bajajfinserv.in/insights/is-your-fixed-deposit-investment-really-safe
