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Know Risks Involved In Investing In Bank Fixed Deposits

fixed deposit scheme Fixed deposits are a popular and dependable investment option because of their high interest rate throughout the tenure, guaranteed return, and tax benefits.

It is a hassle-free investment to start with and comes with lots of features. However, fixed deposit interest rates and plans are subject to changes based upon economic condition and government policies. Hence, it is pertinent to be aware of FD’s risk factors to secure maximum benefits. Consider the below risk factors before you invest your earning:

Default Risk or Credit Risk

Default Risk occurs due to a financial institution’s insolvency or bankruptcy, where the bank may refuse to issue any payment. Though this is an exceptional case in commercial banks, cooperative banks may still run the risk. As per the latest amendment, the Deposit Insurance and Credit Guarantee Corporation has secured up to Rs 5 lakh deposit amount per person for each bank account. However, the amount over and above the specified limit is still susceptible to Credit Risk.among people

Liquidity Risk

There is an option with the bank to withdraw the amount locked in fixed deposits before their maturity date, either by taking a loan or breaking it. If you are in an urgent requirement to meet any significant expense upfront, you have to submit a premature withdrawal form with the bank, and they will process your request to liquidate(withdraw) your fixed deposit. However, such a procedure demands a penalty fee. Moreover, you cannot withdraw corporate fixed deposits before the maturity period. The tax-savings fixed deposit scheme also has restraint on withdrawal. You cannot liquidate before its maturity period of 5 years. A few private-sector banks like HDFC offer up to 90% of the deposit amount with zero processing fee. Still, you can not completely withdraw it without processing charges.

Inflation Risk

among peopleInflation risk occurs when inflation subverts the real value of return from an investment. Inflation leads to the loss of money’s value, and investments exposed to this inflation risk yields less return over the period.

FD returns sometimes can be equivalent to the inflation rates. However, during the upsurge in inflation, it becomes lower than the ongoing inflation rates; even the net worth almost becomes null sometimes. It leads to loss for the investors, and they lose purchasing power over time.

Interest Rate Risk

The fixed deposit interest rate changes from time to time. FDs come with a long maturity period; after investing the amount, the bank locks the interest rate on the amount for the specific tenure.Thus, in spite of high-interest rate in the market, the locked amount will still yield a low rate of return.

FD plans are exposed to the Interest Rate Risk based on two primary factors; the period of time for which the amount is locked as a fixed deposit and the current interest rate at that specific time.

The smart move to avoid such risk is to invest in fixed deposit plans for a shorter period of time. 

The long term fixed deposit plans range from 6 to 10 years. Few banks offer fixed deposit plans for tenure as short as 7 days to 12 months. Hence, consider the present market situation and rapid changes while selecting the tenures.

The risk with Reinvestment

Once matured, you can renew the fixed deposits with the bank. However, reinvestment in the falling rates regime, the renewable deposits will realise a low return rate at the time of maturity. Thus it becomes impossible to renew the deposit at a rate equal to the current return.

To conclude, every investment comes with risk factors. However, the numerous benefits of FD makes it the most reliable modes of investment for common people.

Hence, thorough strategic planning and investing at the right time can help to reduce the chances of the aforementioned risks. You must be prudent while investing your money to generate maximum returns on investment and evade the tax liabilities.