Risk in Fixed Deposit (FDs)! Usually, we believe that the money deposited in bank FDs is completely safe. Also, it guarantees a fixed income. There is no risk of market fluctuations in it. But, is there no risk in the money deposited in banks? Is all the money safe? It is not so. There are some risks in bank FDs as well. Let us know this in 5 points...
100% money is not safe
Usually, the money deposited in bank FDs is safer than other products in the market. But if the bank faces a default situation or defaults, then only up to Rs 5 lakh of the depositor 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 FD is fixed and pre-determined. But inflation can keep increasing continuously. In such a situation, if inflation is adjusted, then the return on bank deposits is very low in the current times. Suppose the inflation rate is 6 percent and the interest on FD is around 5 percent, then your return will be almost negligible.
You can never withdraw the amount
There is a liquidity issue in bank FD. If needed, FD can be broken, but a premature penalty has to be paid for it. The pre-mature penalty on FD can be different in different banks.
There is no profit or loss in reinvestment
If the interest rates on deposits are decreasing, then in such a situation, if you choose the reinvestment option in FD, that amount automatically goes back to FD. But, if the interest rates in the market decrease further, then your FD will not be at the old rate, rather it will be at the reduced interest rate. In such a case, you will get fewer returns than before.
Loss due to a difference of 1 day
Generally, depositors open FDs for a round-figure period like 6 months, 1 year, or 2 years. In some banks, the interest rate on FDs for this round-figure period, 1 day more or less than this, is different. Therefore, before opening an FD, make sure to find out the FD period and the interest on it.
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