Fixed Deposits: Secure but not perfect - 4 hidden risks to know

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fixed deposit (FD) interest rates in India have seen an upward trend. Certain banks are now providing rates as high as 8.25% for senior citizens and 7.75% for the general public. Many individuals opt for FDs as a reliable means to secure a consistent income, avoiding the fluctuations often found in stocks or other market-based investments.Unlike equities, where dividends can vary, FDs provide a stable interest rate that remains unchanged from the time of deposit.

This stability enables you to effectively plan your income and budget. A common question arises regarding whether money deposited in bank FDs carries no risk. In truth, there is no completely risk-free investment, and FDs are no different.

Nevertheless, the risks associated with FDs are typically viewed as low compared to other investment alternatives. Here are the primary risks to consider:Default risk: Bank defaults are rare but it’s crucial to acknowledge the risks. In India, deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to ₹5 lakh per bank account holder.

This ensures that even in the event of a bank failure, your funds are protected up to that specified limit. In general, while bank defaults are a concern, there are safeguards in place to reduce the risk. Being mindful of these risks and diversifying your deposits across multiple banks can provide additional protection.Interest rate risk: Fixed deposits commit you to a fixed interest rate throughout the entire duration.

While this stability is advantageous, it also means that if market interest rates increase during your FD term, you do not benefit from these higher rates. Instead, you are bound by the rate you agreed upon initially. This limitation can be