FDs Still a Safe Bet for Short-Term Savings, But Not Ideal for The Long-Term

If you are saving for your retirement and putting all your money into fixed deposits (FDs), it is a very bad idea because FD returns often do not beat inflation. So, investing in equities is a must. 

However, if you have a shorter investment horizon of one to five years, FDs can be a good option. Here too, you can choose debt funds, but FDs still remain attractive. Let us see why. 

According to Reserve Bank of India (RBI) data, more than Rs 103 trillion is currently held in 24.23 million fixed deposits. “Indians have conservative mindset and not everyone can stomach the volatility which comes with the stock markets,” says Ravi Jain, Co-Founder & MD, Blostem, a banking infrastructure platform. 

So, what are the benefits of choosing a FD? 

Simplicity: FDs are simple to understand. Just choose the tenure and you know you will get guaranteed returns on the money you put in the FD. After the indexation benefit of debt mutual funds were removed in budget 2023, FDs also have a similar tax treatment. 

“A debt fund is also a complex product. There is also an underlying issuer risk and also a duration risk. There are also other factors that can affect the performance of a debt fund,” says Jain. However, with FDs, that is not the case. 

Safety: History suggests that in the last 5 decades RBI has always stepped in to safeguard the interests of the small depositors whenever there is a crisis in the banking system. Also the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank deposits of up to Rs 5 lakh per deppsitor. DGIC covers traditional banks, small finance banks and co-operative banks but does not cover deposits at non banking financial companies (NBFCs). 

 

So, even if the bank  goes bust, up to Rs 5 lakh of your deposits is safe. Let us say, you have Rs 15 lakh to deposit for a period of 3 years. You can then spread your deposits across three banks to ensure that your money is safe. 

Ease of Investing: Investing in FDs is also easy. You can invest in FDs online through the bank website. You can go to any FD aggregator website and choose the tenure of your FD and also choose the interest rate. 

These fintechs also make it easy for you to redeem  FD if required. Remember, if you break your FD before maturity, you would have to pay a penalty. 

Higher Interest Rates: Currently FD rates for SBI for two to three years is seven per cent. However, small finance banks and co-operative banks can offer you a one to two per cent higher interest rate. 

However, greed and lure of higher interest rates is not prudent. “It is wise to understand the credentials of the small finance bank, reserve ratios, lending practices and past record of the promoters, directors and the bank itself. Even after these checks, investors should split his money across small finance banks and large commercial banks,” says  says Gaurav Goel (Entrepreneur, SEBI registered Investment Advisor). 

“It may make sense to invest in FDs of small finance banks only after studying the balance sheet and the fundamentals of such banks.  It is to be noted that all small finance banks are governed by the Reserve Bank of India (RBI) and follow stringent requirements of the central bank,” he adds. 

So, FDs can be your friend when you are investing for a period of five years or less. That is not to say that you should not invest in FDs for long term needs, but it would be a mistake to put all your money into FDs. But for needs in the immediate future, you may definitely consider FDs.