Risk in Bank FD: Are bank deposits really risk-free? Is all your money entirely safe? In reality, it’s not so simple. Bank FDs do come with some risks. Let’s explore these risks in five key points.
Typically, we assume that money in bank fixed deposits (Bank FDs) is entirely secure, providing guaranteed fixed income and being unaffected by market volatility. But is it really true that bank deposits are risk-free? Is all your money truly safe? In fact, it’s not so. There are certain risks associated with bank FDs. Here are five points to understand these risks better.
100% amount is not safe
Generally, bank FDs are considered safer compared to other market products. However, if a bank faces default or goes bankrupt, only deposits up to ₹5 lakhs are insured and safe. This rule also applies to finance companies. The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance coverage for bank deposits only up to ₹5,00,000.
Inflation reduces profits
The interest rate on bank FDs is fixed and predetermined. However, inflation can continue to rise. When adjusted for inflation, the returns on bank deposits can be quite low in the current scenario. For instance, if the inflation rate reaches 6% and the interest on FDs is around 5%, your real return would be almost negligible.
Can never withdraw money
A challenge with bank FDs is liquidity. While you can break an FD in case of urgent need, doing so incurs a pre-mature withdrawal penalty. The penalty for pre-mature withdrawal varies across different banks.
There is no profit or loss in reinvestment
If deposit interest rates are decreasing, opting for the reinvestment option in an FD means that the principal automatically rolls over into a new FD. However, if market interest rates have declined, your FD will not renew at the old rate but at the reduced interest rate. This results in lower returns compared to what you initially expected.
Loss due to difference of 1 day
Usually, depositors prefer FDs with rounded-off durations such as 6 months, 1 year, or 2 years. Yet, some banks offer slightly different interest rates for durations that are slightly longer or shorter than these standard periods. Hence, it’s crucial to check the FD duration and the applicable interest rate beforehand.
Note: This detail is based on a conversation with AK Nigam, Director, BPN Fincap.
