Fixed deposits have been one of the most popular investment options among Indian investors for decades. Fixed deposits offer a secure investment option with guaranteed returns. However, it is important to understand that there are risks associated with every investment option, and fixed deposits are no exception.
Fixed deposits are a low-risk investment option offered by banks and non-banking financial companies (NBFCs). They provide a fixed rate of interest for a fixed period of time (ranging from a few months to a few years). Once the deposit matures, the investor receives the principal amount plus the interest earned during the investment period.
Before investing in fixed deposits, it is important to understand the risks involved. This article provides an overview of the risks involved in fixed deposits.
1. Interest rate risk
Interest rates are the primary driver of returns on fixed deposits. When you invest in a fixed deposit, you lock-in your money for a fixed period of time at a fixed interest rate. If the interest rates rise during the investment period, you may miss out on the higher interest rates. Similarly, if the interest rates fall, your returns may be lower than expected. Therefore, interest rate risk is one of the primary risks associated with fixed deposits.
2. Inflation risk
Another risk associated with fixed deposits is inflation risk. Inflation is the rate at which the general price level of goods and services in an economy is increasing. Inflation erodes the purchasing power of money over time. If the interest rate earned on your fixed deposit is lower than the inflation rate, your returns may not be able to keep pace with inflation. This means that the real value of your investment may decrease over time.
3. Liquidity risk
Fixed deposits are not very liquid investments. Once you invest your money in a fixed deposit, you cannot withdraw it until the maturity date. If you need the money before the maturity date, you may have to pay a penalty for premature withdrawal. Therefore, if you require quick access to your funds, fixed deposits may not be the best investment option for you.
4. Credit risk
Fixed deposits are relatively safe investments because they are backed by banks and NBFCs. However, there is still a risk of default by the issuing institution. If the institution defaults, you may lose your investment and the interest earned. Therefore, it is important to invest in fixed deposits issued by reputable institutions with strong credit ratings.
5. Reinvestment risk
When your fixed deposit matures, you have to reinvest the principal amount and the interest earned. Reinvestment risk arises when the prevailing interest rates are lower than the previous interest rate. This means that if you reinvest your money at a lower interest rate, your returns will be lower. Therefore, it is important to keep an eye on the prevailing interest rates and reinvest your money accordingly.
6. Taxation risk
Fixed deposits are subject to tax. The interest earned on fixed deposits is added to your taxable income and taxed at your marginal tax rate. Therefore, if you are in a higher tax bracket, your returns will be lower after tax. Additionally, if you withdraw your fixed deposit before the maturity date, you may have to pay a penalty and taxes on the interest earned.
Bajaj Finserv App: Your One-Stop Solution for Fixed Deposits
While fixed deposits come with their own set of risks, they remain one of the most popular investment options in India. To mitigate the risks associated with fixed deposits, it is important to invest wisely and choose the right institution for your investment.
Bajaj Finserv App offers a range of fixed deposit options with attractive interest rates and flexible tenures. Bajaj Finserv is one of the leading NBFCs in India with a strong credit rating. Investing in a fixed deposit with Bajaj Finserv may offer you a higher degree of safety and security.
Additionally, Bajaj Finserv App provides a user-friendly platform that allows you to invest, track, and manage your fixed deposits seamlessly. With the Bajaj Finserv App, you can also avail of online fixed deposit renewal and premature withdrawal facilities without any hassle.
The Bajaj Finserv App also offers several other investment options such as SIPs, mutual funds, and bonds, allowing you to diversify your investment portfolio and mitigate the risks associated with fixed deposits.
Fixed deposit remains a popular investment option for Indian investors for their low-risk profile and guaranteed returns. However, it is important to understand the risks associated with fixed deposits and invest wisely. With the Bajaj Finserv App, you can invest in fixed deposits with a reputable institution and manage your investments seamlessly.