Your Fixed Deposits in Banks are NOT Safe

Your fixed deposit or FD in banks are not safe investment as you might think it is. Shocked?

Fixed Deposit Was never 100% safe investment

When it comes to safe investment, people choose no other investment scheme than the Fixed Deposit scheme and there are many reasons behind it. Almost every other person will be having their money lying in fixed deposit account. I don’t think, there is any need to explain, what is Fixed Deposit investment as almost everyone knows about it but still

A fixed deposit is a saving scheme where you can deposit a sum of money for a fixed period of time and you get can earn interest on the same every year. On maturity of the fixed deposits, the depositor gets back the interest earned along with his principal amount that he had invested.

Following are some benefits of Fixed Deposit scheme:

1. Guaranteed return on investment: FD returns are guaranteed, if bank says it’s 8% then you will get 8% interest that year. However, these are subjected to change due to government/RBI decisions.

2. Safe because there is no market risk involved: Fixed Deposit investments are considered to be safe because it is not linked to the share market. It is regulated by RBI and depositor is covered up to Rs. 1 lakh by DICGC.

3. Simple to invest: Investment in fixed deposit id fairly simple and straight forward. You can pay using cheque, cash or online transfer to get started with FD account. There is no maximum cap for the years therefore you can invest in FD for the longer duration.

4. No need to have separate account for investing in Fixed Deposit scheme: Almost all banks offers fixed deposit scheme after all they need our money for their business. It is good for us as well because, we don’t need to open separate account like DEMAT to open fixed deposit. You can simply request for FD either online or by visiting the bank and get the account created for yourself without any paperwork.

5. You can also take loan against your fixed deposit: Banks also offer loan on your current fixed deposit. A person can borrow up to 90% of the fixed deposit amount from their bank. It’s great isn’t it?

6. Better interest rates for the senior citizens: Banks offer different interest rates based on the gender and age. Senior citizens tend to get more interest rate as compared to the normal account older. Therefore, fixed deposit is ultimate choice for the senior citizens specially the ones who are retired from their work and using interest for living.

7. You can have joint fixed deposit account: You have the flexibility to open a Fixed Deposit as joint account

We talked about the lot of benefits about the fixed deposit investment scheme, let’s see the other side of the story.

What will happen if the bank in which you have deposited your hard earned money fails or go bankrupt? Or

What will happen to your lifetime saving lying in the form of FD? Or

What Happens To Fixed Deposits In The Event Of Bank Failure?

Well, you may find it surprising to know that, each depositor is covered up to 1 lakh by deposit insurance and credit guarantee corporation (DICGC).

What does this depositor’s insurance means?

It means, if your bank fails to operate of go bankrupt, you are eligible for up to 1 lakh by DICGC.

No matter what happens to your bank, whether it closes down, is liquidated, undergoes a reconstruction or amalgamation or is merged with another back, your money is still protected and each depositor is insured for up to Rs. 1 Lakh including both the principle and the interest amount accrued.

This applies to all banks whether it is Public, Private, Co-operative or Foreign Banks (with branches in India), all of them are covered by the Deposit Insurance.

But what if you have invested more than 1 lakh?

Unfortunately, you are covered up to 1 lakh only irrespective of your FD’s current valuation. Let’s try to understand clearly.

  1. You have invested INR 80,000 in FD and accumulated INR 12,000 interest. Your FD’s total valuation stands at INR 92,000, in this case if bank go bankrupt, you will get your INR 92,000. Great!
  2. Now, you have invested INR 5,00,000 in GD and accumulated INR 100000 interest. Your total FD’s valuation stands at INR 6,00,000, but if bank go bankrupt, you are entitled to get only INR 1,00,000. Shocking right! You will lose INR 5,00,000 as there is a max cap on the insurance per account.
  3. Let’s see one more scenario, where you have FD investment of INR 5,00,000 in one branch and INR 5,00,000 in other branch and combined accumulated interest is INR 3,00,000. Your FD’s total worth is INR 13,00,000 but you will still get the 1 lakh if bank goes bankrupt.

The situation becomes more horror with the numbers. In India people prefers FD over other investment due to safety reason and other reasons as I have highlighted below. There are only very few people who knows about this clause. NRI’s are the most believer in FD’s and their contribution in fixed deposit are highest.

However, bankruptcy is not the frequent case but one should consider all the aspects before putting the hard earned money.

Following are some best practices to invest in Fixed Deposit.

  1. Consider public sector banks: Chances of going bankrupt is very less for the public sector banks as they have government support.
  2. Investment in Multiple banks: Each accounts are covered with Rs. 1 Lakh insurance, therefore number of banks will multiply your coverage amount. If you have FD in three banks you’re your total covered amount will be Rs. 3 lakhs. Almost all the banks are offering same rate of interest therefore there is no harm in opening FD in multiple banks.
  3. Open FDs on your family member’s name: You can also consider having fixed deposit account on your family member’s name. This will minimize such risks and you will be protected with more coverage.

But, should you only be investing in Fixed Deposit?

I would not suggest investing only in FD. I agree it is still safest investment option compared to stock market of market linked investments. But, do they really serve the purpose?

When we invest money, our intention is to create wealth, and for that we must compare the average rate of return against the inflation rate. If you are getting only 6% interest and inflation rate if also the same then you are making nothing extra. The worth of your money will remain same.

India’ inflation rate stands at 6.7 % (as of May 2019)  and almost all major banks are offering the interest rate between 6.5% to 7%. At this rate, I don’t see any value in investing in fixed deposit.

Plus, if you might already be having clue that, your earned interest is taxable and depending upon the accumulated interest, your tax percentage varies.

As per PaisaBazar

FD Interest is taxable at your slab rate along with applicable surcharge/cess. For example, if you have a total income of Rs 10 lakh per annum, you will be in the 30% tax slab. Let’s say your FD interest is Rs 1 lakh. It will face a tax of Rs 31,200 (tax rate of 30% and 0.4% cess).

The TDS rate on fixed deposits (FDs) is 10% if the interest amount for the entire financial year exceeds Rs 10,000 for AY 2019-20. In the interim budget 2019, this TDS deduction limit on FD has been increased to Rs. 40,000 annually which is applicable in AY 2020-21. Under existing Income Tax rules, the TDS rate on fixed deposit interest is 20% if you do not provide your PAN Card to the bank.

Again, you can refer back to my listing of “best practices to invest in Fixed Deposit” to get most out of your FD investment in this scenario as well.

Where to invest your hard earned money?

I am not saying it’s bad to invest in fixed deposit schemes but one should look for other opportunities to grow or make wealth. If you are investing only for the safety reasons, then you are not always safe with FD.

Wealth cannot be made unless you can continuously beat the inflation rate. Our return on investment should always be more than current inflation in order to gain some practical return on investment.

Diversification on portfolio is much needed in these days and the process of investing in many areas have been simple now. If you are scared of equity investment, then you can simply buy any best performing mutual fund in SIP (Systematic Investment Plan) plan for the long term horizon. Mutual funds are also considered to be safe and high return investment if you do it for long term. They have proved maximum returns as compared to any other investment plans.

If you are in India, you might consider to invest in PPF (Public Provided Fund) if you have plan to invest for long term i.e. minimum 15 years. PPF interest rates are good and the interest earned under this saving scheme are completely tax free after maturity.

Alternatively, you can invest in land or commercial property instead of keeping money in fixed deposit. I am just saying, explore the other investment option rather than sticking to fixed deposit only. Internet is a big world now, just google it, watch YouTube videos to understand such investment options and how they work.

Conclusion:

Investing is Fixed Deposit is Safe but I would not say it’s 100% safe. However, one should follow the best practices to invest in fixed deposit scheme as I mentioned in this article to get the max out their investment. One should also consider diversifying their investment in mutual funds, equities, fixed deposit, bond etc. to create wealth in long run.

What’s your take on the fixed deposit investment? Do mention in the comment section and let me know if you know about any other attractive and safe investment opportunity. This will really help the readers in investing wisely and get max from their investment.

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