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Business News/ Money / Personal Finance/  Fixed deposits: What are the different types?
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Fixed deposits: What are the different types?

In this post, we are going to discuss different types of fixed deposits offered by various institutions. We will cover pros and cons associated with these various institutions.

A fixed deposit is an investment where an investor lends money to a bank for a certain fixed period and receives a commitment of fixed interest on this investment.Premium
A fixed deposit is an investment where an investor lends money to a bank for a certain fixed period and receives a commitment of fixed interest on this investment.

To have a healthy body, the most important ingredient is a balanced diet. A balanced diet should include fibre, carbohydrates, protein & other important nutrients & minerals. Just like a balanced diet is important for a healthy body, a balanced allocation to various different asset classes is important for your investment portfolio. No portfolio is complete without allocation to fixed income assets.

Not only it provides stability to the portfolio, it also protects the downside in case of adverse market movements. New age investors are shying away from these fixed income products as the returns offered are not impressive in their opinion. However, it should be kept in mind that certain components of financial planning require exposure to these fixed income assets, eg: Emergency funds.

In this post, we are going to discuss different types of fixed deposits offered by various institutions. We will cover pros and cons associated with these various institutions.

A fixed deposit is an investment where an investor lends money to a bank for a certain fixed period and receives a commitment of fixed interest on this investment.

READ MORE: Fixed Deposits: 7 banks that have raised interest rates in August. Details here

Fixed deposit by banks

Primary business activity of a bank is borrowing & lending money. A bank makes a profit on the difference between the rate of interest charged to borrowers and the rate of interest paid to depositors. When an investor makes a fixed deposit with the bank, He is assured of a fixed return on his investment. It is difficult to get a banking license in India as there are strict regulations to ensure utmost safety of depositors’ money.

Pros

- Highest safety

- Easy liquidity

- Deposits up to Rs. 5,00,000 per bank are insured by Deposit Insurance & Credit Guarantee Corporation (DICGC), hence, even if the bank goes under, you are guaranteed to receive a minimum of Rs. 5,00,000 per bank account.

- Flexible tenure

- Option to avail loan

Cons

- Lower interest rate: Because of the highest level of safety, the interest offered by major banks is lower than the interest offered by small finance banks or non-banking finance companies.

READ MORE: Fixed Deposits: Worried about the penalty on premature withdrawal of FD? Here’s how to avoid it

Fixed deposits by small finance banks

Small Finance Banks have to target customers from unorganized sector workers, small businessmen, small farmers, micro small and medium enterprises. Also unlike other commercial banks, small finance banks have to open at least 25% of the branches in rural areas.

Small finance banks also have to provide 75% of the loans to priority sectors. They are strictly regulated by the RBI. Small finance banks offer higher interest rates on their fixed deposits as their lending is also on a higher rate to their borrowers.

Pros

- High safety

- Easy liquidity

- Deposits up to Rs. 5,00,000 per bank are insured by DICGC, hence, even if the bank goes under, you are guaranteed to receive a minimum of Rs. 5,00,000 per bank account.

- Flexible tenure

- Option to avail loan

- Higher interest rate as compared to traditional commercial banks

Cons

- Even though deposits up to Rs. 5,00,000 are covered under DICGC. Small finance banks still have a higher probability of failure when compared to traditional commercial banks.

READ MORE: 10 NBFCs that offer 6-7% interest on their fixed deposits

Fixed deposits by non-banking finance companies

Corporate fixed deposits are offered by NBFCs (Non-Banking Financial Companies) that have the authority to collect deposits from the public. There are only a handful of NBFCs in India that have such permission to collect deposits from the general public. Just like banks, these NBFCs also offer a fixed prescribed interest rate for fixed duration. These NBFCs generally offer higher interest rates than traditional banks to attract depositors.

Pros

- Higher interest rate as compared to commercial banks as well as small finance banks.

- Easy liquidity

- Flexible tenure

- Online facility

Cons

- Deposits are not insured by Deposit Insurance & Credit Guarantee Corporation. This means that if the NBFC goes under, you will not have a safety net of Rs. 5,00,000 that was available in case of banks.

- There have been instances in the past, where even AAA rated Non-banking finance companies have defaulted and investors have lost money in fixed deposits.

Tip: Fixed deposit as an investment option should be used to protect capital with a fixed rate of return. Corporates/NBFCs offer higher interest than banks to attract depositors but they do carry a risk of principal. Barring a few top NBFCs that have very strong franchise and parent backing that have demonstrated the consistency of timely payment of interest and principal, It is quite tricky to invest in fixed deposits of other corporates at a cost of losing capital.

A prudent investor should keep this in mind and try to stick to bank fixed deposits or the top tier NBFCs that have demonstrated timely repayment of principal and interest over the past several years. Investors should strictly stay away from corporates offering a very high interest rate when compared to banks or large NBFCs.

CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.

We share details on tax saving fixed deposits. 
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We share details on tax saving fixed deposits. 

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Published: 08 Oct 2022, 12:00 PM IST
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