For years, Fixed Deposits (FDs) have been considered one of the safest investments. More often than not, investors consider their money 100 percent safe within an FD, but is this true? Banks seem to promote FDs as ‘not risky’ investments, but fail to mention some of the most important facts regarding these investments to the customers.
If you are an investor in FDs or thinking of investing in them, these are 5 things you should know before locking your money in a fixed deposit.
1. Your Money Isn’t Fully Safe – Only ₹5 Lakh is Insured
Almost all of them think that every rupee is protected in FD. But if the bank has an unfortunate event or gets shut down, then the Deposit Insurance and Credit Guarantee Corporation (DICGC) will insure it for only ₹5 lakh per depositor per bank.
Thus, this ₹5 lakh insurance on all deposits-FDs, saving accounts, current accounts, and recurring deposits (RDs). So, if you have more than ₹5 lakh kept in one bank, the bank closure may put your money above that limit at risk.
Key Takeaway: Strategically spread your savings to multiple banks, thereby maximizing the insurance coverage.
2. The Interest You Earn is Taxable
Named after PPF and tax-free bonds, this interest becomes fully taxable under income tax slab for the depositors. TDS is also deducted by the bank if one earns more than 40,000 in interest (50,000 in case of a senior citizen) during a financial year.
This has been mostly ignored by most of the investors leaving behind a surprise tax liability at the time of filing of returns.
Pro Tip: Alternatively, one may consider tax-saving FDs (which impose a 5-year lock-in) to be part of Section 80C when filing to reduce taxable income.
3. Inflation Can Bring Loss to Your Money
Fixed deposit offers fixed returns, but inflation works against your real earnings. For example, if you have a fixed deposit earning 6% interest for you while inflation is at 7%, you will lose purchasing power over time.
On top of that, with a locked interest rate, you stand to lose out if the banks raise FD rates suddenly during the time of your investment.
Solution: Top up your portfolio with inflation-beating products like equity mutual funds or gold.
4. Early withdrawal penalty may hurt your return
In case of breaking an FD before maturity, the resulting penalty costs (50 basis points, to perhaps 1%, less interest) are usually imposed. Some banks will discourage even partial withdrawal; as a result, the entire FD has to become due early.
Good strategy: Invest in flexible FDs, or employ laddering strategies (splitting investment into several FDs with varied tenures) to counter penalties.
5. Investment Alternatives Exist for Higher Returns
Being stable, fixed deposits are probably not the best vehicles to grow your wealth. Others include:
- Mutual Funds (12-20% potential returns)
- Stock Market (Long-term growth)
- Debt Funds (Better post-tax returns than FDs)
There are investment vehicles that can deliver greater growth and manage risk well.
Endnotes: Keep FD as an option, but diversify to enhance returns and preserve safety.