Bank FD risk factors: Is there really no risk in the money deposited in banks? Is the whole money safe? Actually, it is not so. There are some risks in bank FDs too. Let’s know it in 5 points….
Bank FD risk factors: Usually we believe that the money deposited in bank fixed deposits (Bank FDs) is completely safe. Also, there is a guarantee of fixed income in it. There is no risk of market fluctuations in it. But, is there really no risk in the money deposited in banks? Is the whole money safe? Actually, it is not so. There are some risks in bank FDs too. Let’s know it in 5 points….
100% amount is not safe
Usually, the money deposited in bank FDs is safer than other products in the market. But if the bank faces a default situation or defaults, then only up to Rs 5 lakh of the depositor is safe. The same rule applies to finance companies as well. Deposit Insurance and Credit Guarantee Corporation (DICGC) gives insurance guarantee of only up to Rs 5,00,000 on bank deposits.
Inflation reduces profits
The interest rate on bank FD is fixed and pre-decided. But inflation can keep on increasing continuously. In such a situation, if we adjust for inflation, then the return on bank deposits is very low in the current times. Suppose if the inflation rate becomes 6 percent and the interest on FD is around 5 percent, then your return will be almost negligible.
You can never withdraw the amount
There is a liquidity issue in bank FD. If needed, FD can be broken, but a pre-mature penalty has to be paid on it. The pre-maturity penalty on FD can be different in different banks.
There is no profit or loss in reinvestment
If the interest rates on deposits are falling, then if you choose the reinvestment option in FD, then that amount automatically goes back to FD. But, if the interest rates in the market fall further, then your FD will not be at the old rate, but it will be at the reduced interest rate. In such a situation, you will get less return than before.
Loss due to difference of 1 day
Generally, depositors open FD for a round figure period like 6 months, 1 year, 2 years. In some banks, the interest rate on FD for this round figure period, 1 or a little more or less days is different. Therefore, before opening an FD, do find out the FD period and the interest on it.
(Note: This detail is based on a conversation with AK Nigam, Director of BPN Fincap.)
