Is your money 100% safe in FDs? 5 factors that every investor should know about fixed deposits
Fixed Deposits (FDs) remain a preferred investment option for many due to the perception that they offer complete security. If you share this belief, then it's time to reconsider, as your money is not entirely risk-free even in FDs as well.
5 risk factors
While it's true that FDs are generally safer than market-linked investments, they are not without risks. Here are five risk factors every investor should be aware of.
Deposits are not completely safe
Many people assume that bank FDs are entirely secure, prompting them to invest significant amounts. While FDs are relatively safe, they aren't risk-free.
Deposits are not completely safe
If a bank defaults, only up to Rs 5 lakh of your deposits, including savings, current accounts, FDs, RDs, or any other scheme, is protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC). If your total investment exceeds this amount, you risk losing the excess.
Penalty on premature withdrawal
Bank FDs have liquidity issues. If you need to withdraw your FD before its maturity, you'll likely face a penalty. The penalty amount varies by bank but typically ranges from 0.5 per cent to 1 per cent.
Penalty on premature withdrawal
Additionally, if you've invested in a tax-saving FD, premature withdrawal not only incurs a penalty but also forfeits any tax benefits.
Tax on interest
Interest earned on FDs is taxable. When filing your Income Tax Return (ITR), the interest income from FDs is added to your total income, which could push you into a higher tax bracket.
Tax on interest
In contrast, some investment schemes offer better interest rates along with tax exemptions.
Flat rate of interest
FDs offer a fixed interest rate throughout the tenure, which may not always work in your favor. If you lock in an FD for a long period and interest rates rise, you won't benefit from the increased rates.
Flat rate of interest
Additionally, after paying taxes on the interest, your effective return may be even lower.
Better investment options
FD interest rates are relatively low, typically ranging from 6 per cent to 8 per cent, with the highest rates seldom exceeding 9 per cent. However, mutual funds, though subject to market risks, often offer higher returns, especially if invested through a Systematic Investment Plan (SIP).
Better investment options
Historically, mutual funds have provided returns of 15 per cent to 20 per cent, making them a potentially more profitable alternative to FDs.