When it comes to saving, many people are looking for a safe and reliable way to do so. With the advantages of higher returns and liquidity, fixed deposits have become one of the most popular choices for savings. However, many people are often left wondering: is a fixed deposit really safe? This article will address this question and give an in-depth look into the safety of investing in a fixed deposit.
What is a Fixed Deposit (FD)?
A fixed deposit is a financial instrument that allows investors to earn interest on their savings at a fixed rate over a predetermined period. It is a type of investment that involves depositing money into an account with a financial institution, such as a bank or credit union, for an agreed-upon term ranging from several months to several years.
Fixed deposits are considered one of the safest investment options available due to their low-risk nature. They offer guaranteed returns and are ideal for individuals who want to earn interest on their savings without exposing themselves to market volatility. Fixed deposits also allow investors to choose the term and amount of investment based on their financial goals.
Furthermore, fixed deposits typically come with higher interest rates than regular savings accounts. This makes them an attractive option for individuals looking to maximize their earnings while keeping their funds secure.
Understand in detail – What is a Fixed Deposit Account?
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Why is Fixed Deposit a Safe Investment?
Is fixed deposit safe? This must be the first question coming to your mind when talking about an FD, and you should know that a fixed deposit is indeed a perfect choice for individuals who want to who want high investments with low risk. The main reason a fixed deposit is a safer investment option is that it is not affected by the market fluctuations and guarantees returns for financial growth.
Regulations by the RBI
According to the RBI (Reserve Bank of India), deposit insurance is mandatory for every bank. If you are investing with a bank, that will be protected under the DICGC (Deposit Insurance and Credit Guarantee Corporation) scheme that will cover ₹5 Lakh. So, even if the bank collapses, this insurance scheme protects your invested money.
Investments Above ₹5 Lakh
But are fixed deposits safe in India if the investment is above ₹5 Lakh? As mentioned earlier, the DICGC scheme allows a cover of protection till ₹5 Lakh, but what if you have more than that? Well, the scheme won’t cover that, even if you have multiple FD accounts in the same bank. So, what should you do?
It’s advisable to open FD accounts in multiple banks so that you can stay assured your money is safe.
What are the Risks Associated with Bank FDs?
While bank FDs might be your first and foremost choice when opening a fixed deposit account, it’s essential to understand the risks attached to them.
Most investors choose bank FDs for investment because of their high liquidity in comparison to other financial instruments. However, you need to note that this feature is not uniform in every bank FD in the market. For instance, a tax-saver deposit will need you to invest for at least five years, and there won’t be the option of liquidity before it hits its maturity period.
While bank FDs are generally safe to invest in, there have been some instances in the past where the bank has defaulted on payments. Although this has been mitigated with RBI’s regulation that covers up to ₹5 Lakh, anything above that will not be covered in this scheme, and this investment can risk default if the bank collapses.
Another instance where you might raise the question of whether bank deposits are safe is during the inflation period. While FDs are safe to invest in general, every type of financial instrument is subject to get influenced by inflation. For instance, if a bank offers 4% interest on FD savings, and the inflation rate is at 5%, you will receive lower returns than the inflation rate.
A bank FD allows tax benefits for senior citizens above 60, but if you’re not falling under this age criteria, the return rate will be applicable based on your tax slab and the bank you’ve opened your FD.
Learn More – Income tax on FD interest
Once your FD has matured, you will have two options: you can either receive your total payout, or you will have to renew your deposit. If you choose to renew your deposit, your FD will be subjected to the current interest rate in the market. And if the rate is lower, this renewal can indeed hamper the financial goals you thought for your future.
Why Should You be Investing in an FD?
While there are some risks or disadvantages involved with bank FDs, investing in this financial instrument has several advantages. Here are some of the reasons you should be investing in a fixed deposit account:
With an FD, you are going to receive fixed returns since it won’t be impacted by frequent market fluctuations like other financial instruments.
Higher Interest Rates
Compared to other risk-free investment options, like Government Bonds and Treasury Bills, banks offer higher interest rates for fixed deposits.
You can choose to open a fixed deposit for as short as seven days to as long as ten years. Further, upon maturity, you can payout through different options: quarterly, annually, half-yearly, or cumulative.
Senior Citizen Benefits
Banks FDs have special benefits for senior citizens, like higher interest rates for longer tenures and higher tax exemption limits. If funds are locked in for five years, the investors are allowed a tax exemption of up to ₹1.5 Lakh every financial year.
Other investment options like debt funds, equity funds, gold funds, direct equities, and more are known to be vulnerable to larger market risks and fluctuations. But in comparison to them, FDs are not as affected by uncertain market movements and fluctuations.
Related post – Benefits Of Fixed Deposits You Need To Know
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Is FD better than stocks?
Both FD and stocks carry different financial goals. On one hand, stocks are high risk and have high returns, but those returns have no stability. While FDs are a stable means of investment and great for a beginner investing for the future. So, if you are looking for stability and thinking about long-term investment, fixed deposits are better and safer in India.
Are FDs safer than mutual funds?
Mutual funds are volatile to market risks, while fixed deposits are not market volatile. Hence, FDs can offer fixed returns despite market conditions, making them a safer option.
Can you lose money in a fixed deposit?
₹5 Lakh of your FD amount is covered under the RBI’s DICGC scheme. So, you are unlikely to lose any money in your fixed deposit account.
Which is the safest bank for fixed deposits?
Opening a fixed deposit account with Freo Save relieves you from the worries of trust issues since it is a technology-driven, completely safe, and secured banking backed by Equitas. With Freo Save, you also get higher returns due to the high-interest rate on your FD savings!