Fixed deposit investments have  5 risks.

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Fixed deposit investments have 5 risks.

1. A risk of liquidity

Generally, fixed deposits are an easy way to access funds, but not all fixed deposits are liquid. An investor cannot liquidate a tax saver FD before it reaches maturity because it has a five-year lock-in period.

The individual may also have to visit the branch and fill out paperwork to liquidate their fixed deposits if the bank does not offer online liquidation.

2. The risk of default

A few small cooperative banks have defaulted, and investors are usually vulnerable in these situations. Currently, investors can have a deposit insurance of up to Rs. 5 lakh per account, but any amount above this is subject to default.

3. Risks associated with inflation

Inflation affects every investment and increases risk, an unsaid truth. If the current inflation rate is 6% and a FD pays 8% interest, the real return earned is just 2%. Although FD interest rates are fixed and have no effect on market fluctuations, inflation affects the real returns.

Also Read : 6 powerful Tips for Long-Term Investing.

4. Taxation that is high

If you’re over 60, interest earning from fixed deposits is exempt from tax under Section 80 TTB if you are over 60. In addition to your income, interest earnings are taxed according to your classification.

Thus, if you’re in the 30% tax bracket, you may receive only 4.9% on a 7% FD.

5. Risks associated with reinvestment

In order to address this particular risk, let’s ask a question: What happens after the maturity of a Fixed Deposit? As and when an FD matures, an investor has two options – withdrawing the money or extending it.

An investor can get a new FD at the rate that is currently in effect. If you can’t reinvest money at a lucrative rate of return, you could jeopardize your long-term financial goals.

When invested for the long term, fixed deposits are an excellent source of income, despite the risks described in the article.

Compared to other investment options, the scheme still carries fewer risks. The investors should therefore try to invest in the scheme with thorough knowledge of the market and the scheme in advance.

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