Fixed Deposit Risk Assessment - Biggest Risks of FD (2024)

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1. Flexible tenor -FD scheme offered by banks enables users to select from wide tenor options starting from seven days to ten months.
2. Offers guaranteed returns -Unlike those investment instruments which are market dependent, FDs provides guaranteed and fixed returns as per the applicable interest rates during the time of investment.
3. Offers loan against FD scheme -FDs offered by certain Indian banks enables users to choose a secure loan against their FD in case of emergency. This option allows the FD accountholders to access their fund without withdrawing the FD prematurely.
4. Fixed rate of interest -The rate of interest offered on the FD scheme depends on the bank and remains fixed all through the tenor of the FD scheme.

1. High investment returns -The return on investment depends on the tenor of the FD scheme. The higher the tenor of the FD, the more the return from the FD during maturity will be.

Risks Associated with Fixed Deposit Scheme

The following are the five significant risks associated with fixed deposit scheme:

1. Default risk -In some cases, banks have defaulted on the payment after maturity of the FD. To mitigate the default risk, the Reserve Bank of India has set forth some guidelines according to which investors will receive insurance on FDs up to Rs.5 lakh.
2. Liquidity risk -FDs offer a higher liquidity rate than other financial instruments. But the liquidity rate is not uniform across all banks and all FD types, such as tax-saving FDs cannot be liquidated before its maturity period of five years.

1. Inflation risk -Inflation influences the return value of the FD irrespective of the type of FD you invest in. The rate of return received by the accountholder will be less than the inflation rate and hence, the return on your deposit will not beat the inflation rate.
2. Reinvestment risk -FD schemes offer a reinvestment option after maturity after which you can reinvest the total FD amount which will be subject to prevailing rate. This system may also lower your return if the prevailing rate is lower than the previous interest rate.
3. High taxation -FDs are liable to TDS (Tax Deducted at Source) as per applicable rate. Senior citizens do not need to pay tax and can claim tax benefit under Section 80TTB. While citizens do not fall under the age bracket of above 60 years will need to pay TDS.

Things to Consider Before Investing in a Fixed Deposit Scheme

The following are the points that should be considered before investing in a fixed deposit scheme:

1. Private banks or Public sector -Perform market research before opting for FDs in a private or public sector bank and look for a suitable rate of interest before investing in an FD to ensure high returns on your investments.
2. Senior Citizen offers -Most of the Indian banks offer higher rate of interest to their senior citizen customer. The rates are 0.5% or 1.50% higher than regular FD interest rates. Therefore, if you wish to open senior citizen FD, look for the ongoing rates and other offers.
3. Risks on interest rates -Interest rate risk is one of the biggest risks while investing in FDs. If the interest rates are low and the FDs are locked in a fixed tenor, then the return earned will also be low.
4. Split your investment -Keeping your fund for long tenors at a fixed rate of interest may lead to lower returns, if the ongoing rates increase suddenly than the rate at which you locked your FD. Therefore, you must consider splitting your investment up to Rs.1 lakh in different funds, as only Rs.1 lakh is backed by the deposit insurance of India.
5. Analyse company’s profile before investing -Verify the market reputation and profile of the company or Non-Banking Financial Corporation (NBFCs) you are planning to invest your funds in. Evaluate the financial status, business prospect, and the company rating as per the rating agencies, such as CRISIL, and others. Analyse the comments and remarks given by various investors or special notes given by rating agencies regarding the financial health of the company.

1. Select quarterly compounded interest -Opt for those banks that calculate the compounded interest on FDs and offer interest on a quarterly basis. Going for a yearly interest payout apart from high rate of interest may yield lower returns than interest paid out on quarterly basis.