Is Your Money Safe in a Fixed Deposit? Here’s What You Need to Know

Is Your Money Safe in a Fixed Deposit? Here's What You Need to Know

Is fixed deposit safe? Fixed deposits have long been a popular investment choice for Indians. It is commonly used as a reliable way of generating regular income or the best place for stashing that extra cash. Cash that could be used if anything untoward happens or for the “big” expenses. FDs offer a secure way to save and grow your money, with the benefit of potentially higher returns than a traditional savings account. Recent events in the banking space, like in Yes Bank, PMC, and DHFL, also have investors questioning the safety of their money in a fixed deposit.

Being the common investment choice that FD is, sometimes it is assumed to be the only suitable choice for uninformed investors. This misjudgment can impact investors from the angle of returns, taxes, and unmet financial goals. Like any investment decision in your life, fixed deposits should also follow a path of suitability and due diligence. When making an investment decision, it is important to consider a variety of factors that are specific to you. These can include your personal circumstances, such as your current financial situation and future financial goals, and your risk appetite, which refers to your willingness to take on risk to achieve higher returns. Additionally, the investment horizon, or the amount of time you plan to hold the investment, should also be considered. Together, these factors can help you make a more informed and appropriate investment decision that aligns with your overall financial plan and objectives.

With that in mind, one of the main benefits of fixed deposits is their reliability for short-and medium-term financial goals. They offer a fixed interest rate and are a less risky choice for a need/goal that is due in the short or medium term. You can confidently plan and budget for the future, knowing exactly how much you will earn. But the suitability may also depend on your tax status. They can be a reliable place for parking contingency funds but have the demerits of pre-mature withdrawal penalties. However, for long-term objectives, fixed deposits aren’t a suitable investment choice. Long-term goals give you the benefit of taking risks. Equity and flexible instruments like mutual funds are a much better choice to outpace inflation and generate handsome returns. Hence, an investor with a high-risk appetite is better placed to use these vehicles to plan financial goals.

Now, coming to the risk aspect of FDs, it is commonly believed that fixed deposits are very safe vehicles for your money. After all, they are offered by banks and other financial institutions, which are regulated by the Reserve Bank of India (RBI). However, it is important to remember that not all banks are created equal, and a bank can fail or become insolvent. With retirees, we have seen large sums being parked into FDs to generate regular monthly income.

But, not to worry, RBI thought ahead on this, and that is where the Deposit Insurance and Credit Guarantee Corporation (DICGC) comes in. DICGC is a subsidiary of the RBI that insures all deposits, including fixed deposits, up to a certain limit. Currently, the insurance limit is set at 5 lakhs per depositor per bank. This means that if a bank fails, depositors will receive up to 5 lakhs in compensation for their insured deposits.

While DICGC insurance provides a safety net for depositors, it is still important for investors, especially retirees, to be cautious when selecting a bank for their money when the amount exceeds five lakhs. One of the best courses of action is diversification of your deposits across different types of banks, such as private, public, and cooperative banks.

In conclusion, fixed deposits can be a safe and reliable investment choice for short-and medium-term financial goals depending upon your risk profile and financial goals. By being mindful of the bank’s financial health and diversifying your deposits, you can ensure that your money is secure in a fixed deposit.

~Nischay Avichal

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