5 things investors must know about fixed deposits before investing
Are you thinking of investing in fixed deposits? If yes, then you need to know these important things about FD which banks often keep hidden from investors. Here are five important aspects, including security limitations, tax implications and more, that every investor needs to know.
Many people invest in Fixed Deposits (FDs) believing they offer guaranteed returns and that their money is completely safe. However, the reality is that your funds aren’t 100 per cent secure, even in an FD.
Five important points to consider before investing in FDs
There are certain risks involved, and banks often don’t disclose key information that every investor should know. Here are five important points to consider before investing in FDs:
How safe is your money?
While FDs are generally considered safe, if your bank defaults, only deposits up to Rs 5 lakh are protected. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank deposits up to this limit.
How safe is your money?
It’s crucial to note that this insurance covers the total amount across all accounts—savings, current, FDs, and recurring deposits. If your total deposits exceed Rs 5 lakh, any amount over this limit may be lost.
Tax on Interest
The government taxes the interest earned on FDs, which is treated as income when filing your Income Tax Return (ITR).
Tax on Interest
Nowadays, there are various investment schemes that offer better interest rates than FDs and come with tax exemptions, so it’s wise to explore those options.
Fixed Interest Rates
When you invest in an FD, the interest rate remains fixed for the entire tenure. If interest rates rise during this period, you won’t benefit from the increase.
Fixed Interest Rates
This can lead to potential losses, especially when combined with the tax you have to pay on the interest earned.
Penalty for Premature Withdrawal
FDs can pose liquidity issues. If you withdraw your funds before the maturity date, you’ll incur a penalty, which typically ranges from 0.5 per cent to 1 per cent of the principal amount.
Penalty for Premature Withdrawal
While tax-saving FDs allow for early withdrawal after a five-year term, you will forfeit any tax benefits if you do so.
Better Alternatives Exist
Current interest rates on FDs generally range from 6 per cent to 8 per cent, with a few banks offering up to 9 per cent.
Better Alternatives Exist
However, many investors have found that mutual funds can provide significantly higher returns, often between 15 per cent and 20 per cent. While mutual funds come with market risks, using a Systematic Investment Plan (SIP) can help mitigate these risks over time.