Since the onset of the COVID-19 pandemic, it's been a year where the world has changed. Our lives have been transformed, and the financial system, too, has been hit hard. In such a scenario, investors have looked for safe havens to park their hard-earned money. They have sought options that are low on risk while assuring returns. One such popular investment choice has been bank fixed deposits (FD), mainly because they are low on the risk metre. However, what not many investors are aware of is that FDs come with a few risks as well.
Take these following points into account before choosing a bank fixed deposit.
1. Withdrawing money before maturity
When you are investing in a fixed deposit, your money is parked for a certain amount of time till it matures. You can withdraw the money in case of an emergency before the term, but then you'll have to pay some penalty. So, keep in mind the exit route before maturity or the lack of it while investing in a fixed deposit.
2. Choose a reputed bank
Though it doesn't happen often, small banks can be prone to defaults. So, whenever you wish to invest in an FD, it's better to do so with a reputed bank. Do not get lured by high rates offered by lesser-known banks. In other words, just the rate of return should not be the sole guiding factor while choosing an FD.
3. In case of inflations, what happens to the real return
Real return is what an investor gets after the return is adjusted for inflation. For example, if the returns from fixed deposit is 6 per cent, and inflation is 3 per cent, then your real return would be just 3 per cent. In other words, you are getting less in terms of real value. So, keep this in mind while parking your money in an FD.
4. Want to reinvest your money after it matures? Even that comes with risks
As we mentioned earlier, FDs have a fixed maturity term. So, imagine a scenario where you have invested your money in a 2-year term FD. After maturity, you can either withdraw the money or choose to reinvest. However, at that point of time the interest rates may be really low. As a result, you won't be able to invest again at lucrative rates.