Recent events at Yes Bank have raised concerns about the safety of money kept in bank fixed deposits. Though the bank has lifted the moratorium on withdrawals above 50,000 per person, the occurrence of such an event has become a point of concern as memories of the crisis at the Punjab and Maharashtra Co-operative Bank remain fresh. Moreover, even though the Reserve Bank of India (RBI) has raised the deposit insurance cap to 5 lakh, many depositors, especially senior citizens, keep a higher amount in bank FDs. Neil Borate asked experts what is the best fixed deposit strategy depositors can follow

Nishith Baldevdas, Chennai-based Sebi-registered financial adviser

For each family member, restrict amount to 5 lakh

First and foremost, each investor should keep in mind that there is a risk in all asset classes and all financial products you invest in. In today’s world, there are no risk-free investments. Each and every investment carries risk and as an individual, we all fail to understand the same.

Use State Bank of India’s (SBI) FD rates as benchmarks and start investing in banks that are offering 40 to 50 basis points (bps) higher than them. Split the FDs in the names of various family members, as per their income and reduce the risk of illiquidity (this will come handy during turbulent times).

Budget 2020 has increased the limit of deposit insurance to 5 lakh from 1 lakh earlier. So try restricting each holder’s FD amount to 5 lakh. Always open an FD with either or survivor mode, so that in case of a medical emergency, the liquidity aspect can be taken care of.

Finally, to get extra returns, you can keep 20-30% of your corpus with banks offering 80-100 bps extra over SBI’s FD rates.

Adhil Shetty, CEO, Bankbazaar

Hold multiple small deposits instead of a single large FD

You should spread your FDs among banks to achieve the right balance between risk and returns.

Several co-operative and small banks offer 1-2% higher interest rates. However, these banks may be less stable compared to the well-established, government-owned or private ones. So, while availing any high-return deposit scheme, evaluate your risks. If you wish to take exposure with riskier banks, limit the exposure to the point where you won’t feel the pinch in case the bank were to undergo a crisis.

Generally, few banks allow for partial withdrawal of FDs and in most cases the FD has to be entirely broken. Breaking an FD results in lower rates of interest and even penalties at times. So instead of one large FD, hold multiple smaller FDs. If you are in urgent need of funds, you can break one of these, and as the FD amount is small, you won’t lose much.

It is always a good idea to hold joint FDs and savings accounts with a trusted family member who can access the FD on your behalf in case of an emergency.

Swati Singh, Executive director and head, fixed income, Avendus Wealth Management

Diversify among NBFCs, private and PSU banks

Investors in FDs of banks and non-banking finance companies (NBFCs) need to have more discipline when it comes to allocation of money between private sector banks, top-rated NBFCs and public sector banks. In these uncertain times, it’s prudent for investors to have allocation across these three categories but remain in the most reputed names.

While for corporate deposits, one can choose AAA-rated options, for banks, one can remain with top PSU and private banks where the bonds or long- term borrowings of the same entities carry the highest rating.

Chasing higher returns in a few private sector and cooperative banks has caused trouble in the recent past. Hence, one should focus less on the higher returns but pay more attention towards safety and liquidity of the investment.

Going forward, we believe predictable returns, diversifying portfolio risk and falling interest rate expectations could become key drivers for allocation in FDs.

Feroze Aziz, Deputy CEO, Anand Rathi Pvt. Wealth Management

More than 90% FDs less than 5 lakh so no need to worry

FDs in a scheduled commercial bank are very safe, irrespective of all the turmoil in the banking sector. None of the banks have been permitted to fail, if historical track record of decades has any weightage in your strategy.

In Budget 2020, the deposit insurance limit was raised from 1 lakh to 5 lakhs. So even if the bank goes bankrupt, investors need not worry and have sleepless nights as more than 90% of the fixed deposits are below 5 lakh.

Investors who want to invest more than 5 lakh in FDs can diversify across four to five family members and across different scheduled commercial banks. So, if you invest 5 lakh each in four different scheduled commercial banks, you can cover up to 1 crore under deposit insurance.

Investors who put in above 1 crore are high net-worth individuals who anyway do not put all their savings in fixed deposits. The Yes Bank episode is just a reiteration that the Reserve Bank of India is a strong regulator and a test that depositors’ money is safe and secured.

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