Fixed deposits (FDs) have long been a safe and popular option for Indian investors. Despite the growing popularity of mutual funds and the stock market, about 15% of household savings still go into FDs. However, the safety of FDs also comes with certain risks and limitations, which are important to understand before investing. The Indian banking system is well-regulated and promotes the safety of FDs. However, as per the guidelines of the Reserve Bank of India (RBI), each individual gets protection on deposits up to a maximum of ₹5 lakh per bank. Any amount above this may be at risk.
FDs in public sector banks are considered the safest, while FDs in private sector and small finance banks offer higher interest rates but also carry higher risks. Events such as the ban imposed on Yes Bank and Global Trust Bank prompt investors to be cautious. Similarly, it is extremely important to check the credit rating, reputation, and lock-in period of corporate FDs before investing in them.
Returns that lag inflation
Even though the interest rate on FDs is fixed, the actual return can decline due to inflation and taxes. For example, if a high-income individual gets 8% interest on FDs, it becomes only 4.88% after tax deduction. If the inflation rate is 6%, the actual return becomes negative.
Also, FDs do not have the benefit of compounding like mutual funds or the stock market, where returns are taxed only at the time of receipt, thereby helping in wealth accumulation over time.
Although FDs are a safe option, their limited growth potential makes them unsuitable for long-term wealth creation. Investing in equity-based products for 7–10 years has lower risk and higher returns. Hence, investors should understand the risks involved in FDs and plan their investments with a balance between safety and growth.
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