Authored by shishir chaurasia | Navbharat Times | Updated: Nov 30, 2021, 10:08 AM
Term Deposit or Fixed Deposit, irrespective of the bank, it is considered as a safe investment as compared to other means of investment. This is because in this you are promised a fixed return. But experts say that there are some risks involved in this too.
If you invest in FDs and not mutual funds, then be ready to face these 5 dangers
liquidity risk
Bank FD can be easily broken like this. But, if it is broken before the maturity date, then some penalty amount is levied in it. The penalty amount on FDs may vary from bank to bank. If you have invested in any tax saving FD, then you can withdraw it even before the period of five years. But in such a situation, you will not get the facility of tax saving.
danger of default
By the way, the risk of a bank defaulting in the banking system is very less. Even then, there is always the fear of a bank defaulting in the event of a crisis. Deposit Insurance & Credit Guarantee Corporation insures your deposits up to Rs.5,00,000 only. If, you have kept more than this amount in FD and the bank sank, then you also lost your money.
inflation risk
In every FD, the amount of Fixed Deposit Return is pre-decided. But, you know that due to some reasons your previously declared returns can also go down. Yes, if the inflation rate in the economy is increasing rapidly, then your FD return will decrease. In a way, there is no provision to avoid the risk associated with inflation.
interest rate risks
If you have made an FD for 5 years, then there is a lock in period of 5 years on your amount. Let’s say that you have made an FD in a bank for 5 years at 4% annual interest and later the interest rate increases. Even then, you will get paid at the old interest rate. The new rate of interest will not be effective on your FD. But, we can take it in another way that even the interest rate cut will not affect it.
Risks associated with reinvestment
There is a tendency to decrease the interest rate in the market right now. In such a situation, if you choose the FD Reinvestment Option, your FD is automatically reinvested on maturity. At that time, if the interest rate decreases further in the market, then your new FD will not be made at the old rate but at the reduced interest rate.
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