What are the risks of investing in bank fixed deposits?
Posted by: Labdhi Mehata on Jun 01, 2020, 06.30 AM IST
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 Tax saver FDs cannot be withdrawn before completion of the 5-year tenure.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: Bank defaults are rare but possible. 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.
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