What are the risks of investing in bank fixed deposits?

1. Liquidity risk: Bank fixed deposits (FDs) can be easily liquidated. However, a penalty could be levied. Tax saver FDs cannot be withdrawn before completion of the 5-year tenure.

2. Default risk: Bank defaults are rare but possible. However, deposit amount including interest of up to Rs 5 lakh per person per bank is guaranteed by the DICGC and any amount over that is subject to default risk.

3. Inflation risk: FD returns at times can be around the same as inflation or even lower than inflation rates leading to wealth erosion for the investor.


4. Interest rate risk: Bank FDs carry the risk of being locked in for a long tenure at low rate of return.

5. Reinvestment risk: In a falling interest rate environment, FDs that are due to mature will get offered a lower rate at the time of maturity.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)