Is there any investment risk in bank FDs? Expert on why you must know these 5 things before depositing money

Risk in Fixed Deposit (FDs)! Usually, we believe that the money deposited in bank fixed deposits (bank FDs) is quite safe as it is a guaranteed return scheme. Since returns in FDs are based on interest money and not on equities or other market instruments, people who need a regular income without any interruption invest in FDs. But is there really no risk to the money deposited in bank FDs? Is all the money safe? Actually, it is not so.

There are some risks in bank FDs as well. Let us know this in 5 points through the views of AK Nigam, Director, BPN Fincap.

100% amount is not safe

Generally, bank FD deposits are safer than other money market products.

But if the bank faces a default situation or defaults, then only up to Rs 5 lakh of the depositor's deposit is safe.

The same rule applies to finance companies as well.

Deposit Insurance and Credit Guarantee Corporation (DICGC) gives an insurance guarantee of only up to Rs 5,00,000 on bank deposits.

Inflation reduces profits

The interest rate on bank FDs is fixed and predetermined. But inflation can keep increasing.

In such a situation, if we adjust for inflation, the return on bank deposits is very low in the current times.

Suppose that if the inflation rate becomes six per cent and the interest on FD is around five per cent, then your return will be almost negligible.

Lock-in period

There is a lock-in period in bank FDs. FDs can be broken if needed, but a pre-mature penalty has to be paid in that condition.

The pre-maturity penalty on FDs may vary among different banks.
 

There is no profit or loss from 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, your FD will not be at the old rate; rather, it will be at the reduced interest rate.

In such a situation, you will get less returns than before.

Loss due to difference of 1 day

Usually, depositors open FDs for a round figure period like six months, one year, two years, etc.

In some banks, the interest rate on FDs for this round figure period, one day more or less than this, varies.

Therefore, before opening an FD, do find out the FD period and the interest on it.