Fixed deposits have been a better scheme for investors, as it offers the advantage of guaranteed returns and has less risk. There are two types of fixed deposits, one of the most commonly used being FDs, which are offered by banks and have a low risk appetite. While the other is corporate fixed deposits which offer higher interest but carries a lot of risk as compared to bank fixed deposits.
It is often seen that investors are very clear when it comes to returns on FDs, but the risks associated with FDs are still less clear. For this reason, we are going to tell you about such risks, which can affect your money.
Fixed deposits are said to ease the availability of funds. However, not all fixed deposits have high liquidity. Like a tax saver FD has a lock-in period of five years, due to which the investor cannot liquidate the fund before maturity. If he tries to do so he may lose money. Also, if a certain bank does not have an online facility, one may have to visit a branch and do paperwork to withdraw funds from his or her fixed deposit.
risk of default in payment
There have been some cases of default by small co-operative banks, in such situations these investors may have to pay the amount along with the penalty. It is worth noting that under a new rule, investors can insure deposits up to Rs 5 lakh per account. But any amount above that is subject to default risk.
Inflation affects every investment and increases risk. If an FD gives 8% interest and the rate of inflation is 6% at present, the actual return earned is only 2%. It is true that the interest on FD is fixed and has no effect on market volatility, but the actual returns increase or decrease according to inflation.
Interest income on fixed deposits can be fully taxable, as long as you do not exceed 60 years of age. Where exemption of Rs 50,000 is u/s 80 TTB. Your interest income is clubbed with your income and taxed as per your slab. So, if you are in the 30% tax slab, a 7% FD can effectively provide you only 4.9% returns, which is further reduced by rising inflation.
On maturity of the FD, the investor can choose from two options. Either withdraw the money or increase the FD. The investor can get a fresh FD, but only at the rate that is applicable now. This can jeopardize your long-term financial goals, as you cannot re-invest the money at an attractive rate of return.