Fixed Deposits (FDs) are one of the most preferred methods of investing money in India.
Some conservative investor prefer FDs because FDs are not linked to the market, so there is no volatility involved.
Fixed Deposit (FDs) is not a safe Instrument for putting money
SEVEN type of risk is involve with investing in Fixed Deposit (FD).
1. Liquidity Risk:
Bank fixed deposits (FDs) can be easily liquidated. However, a penalty could be levied. Tax saver FDs cannot be withdrawn before completion of the 5-year tenure.
2. Default risk:
Due to increase of NPA Bank get defaults. However, deposit amount including interest of up to Rs 5 Lakh per person per bank is guaranteed by the DICGC and any amount over that is subject to default risk.
3. Inflation risk:
FD returns at times can be around the same as inflation or even lower than inflation rates leading to wealth erosion for the investor.
4. Interest rate risk:
Bank FDs carry the risk of being locked in for a long tenure at low rate of return.
5. Reinvestment risk:
In a falling interest rate environment, FDs that are due to mature will get offered a lower rate at the time of maturity.
6. Taxation :
The interest earned on bank FD is subject to tax as per one’s income tax slab. The amount of interest income gets added to the ‘Income from other sources’ and then taxed. Illustratively, on a bank fixed deposit of 7.5 per cent p.a, the after-tax return for taxpayers in the 5 per cent, 20 per cent and 30 per cent tax brackets works out to be 7 per cent, 5.94 per cent and 5.16 per cent, respectively.
Investment in bank FDs should ideally be for the purpose of capital preservation. Saving through FDs for a long term goal is financially damaging. Post the impact of tax and inflation, the real return in bank FD is almost negligible.
Parinita Sharma is a Certified Financial Planner (CFP) & FS, CS, MDI, PG.
She is a member of team Advey. Team Advey is associated member of LIC of India with 100 Professional partners.
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