Bank FDs Key Factors: Bank FDs are a traditional investment option in the country. Generally people believe that money in banks is safe and returns are also guaranteed. There is no risk of market volatility in this. However, it is not so. Bank FDs also have some risk factors. If you are also planning to get bank FD, then you should know these things.
1- Full money is not safe
Generally people consider bank FD as completely safe and deposit their large amount. Although the money in FD is safe, but if the bank defaults in any condition, then only the deposit of the investors up to 5 lakh remains safe. The same rule is applicable to finance companies as well. Deposit Insurance and Credit Guarantee Corporation (DICGC) gives insurance guarantee on bank deposits up to Rs 5,00,000 only.
2- Rising inflation reduces profits
The return on bank FD i.e. the interest rate is fixed and pre-decided. But inflation may continue to rise. In such a situation, if inflation is adjusted, then the return on FD is very less in the current era. Suppose if the inflation rate becomes 6 percent and the interest on FD is between 5-6 percent, then you will get negative return only.
3- Loss in withdrawing money when needed
There is an issue of liquidity in bank FDs. Although the FD can be broken if needed, but a pre-mature penalty has to be paid on it. What will be the penalty amount on FD, this amount may be different in different banks. If you have invested in any tax saving FD, then you can withdraw it even before the tenure of 5 years. But then you will not get the benefit of exemption in income tax.
4- Disadvantages of reinvestment option
If the interest rates on deposits are decreasing in the market. In such a situation, if you choose the reinvestment option in FD, then that amount will be automatically reinvested. But, here you have to keep in mind that if the interest rates are decreasing further in the market, then your FD will not be at the old rate, but it will be at the reduced interest rate only. In this case, you will get less return than before.
5- 1 day difference
Usually people make FD according to the period called round figure like 6 months, 1 year, 2 years etc. In some banks, for this round figure period, the interest rate on FDs varies from 1 or a little more or less days to this. Therefore, before opening an FD, make sure to know the FD tenure and the interest on it. It is possible that instead of round figure period, some extra interest can be got for a few days more or less. (Note: This information is based on conversations with AK Nigam, Director, BPN FinCap.)
