What are FDs
Fixed deposits (FDs) are financial instruments that are issued by banks and non-banking financial companies (NBFCs). One can choose to deposit a sum of money for a specific period of time and receive interest on the sum for the duration of the deposit. Fixed deposits are easy to open and reliable and hence have become the go-to financial instruments for individuals who wish to set aside money to grow without exposing it to any kind of risk. Most financial planners when helping individuals set aside emergency funds almost always recommend that the money be put into a fixed deposit.
What are defaults?
A default is the failure to repay a debt. Defaults happen when borrowers are unable to make payments. In the case of fixed deposits, a default would mean that the bank or NBFC that someone has made a fixed deposit with is unable to pay the interest or return the amount to them.
How do fixed deposits work?
Banks and NBFCs, institutions that provide FDs, are broadly engaged in two activities – borrowing and lending. They invite individuals to deposit money with them, technically borrowing it, and providing them interest on the deposited sum. The money received through different accounts is then used for their lending operations. After meticulous calculations and various considerations, the money is given out, keeping in mind the ability of the borrower to pay back, and in many cases, asking for collaterals – something that is pledged as security for repayment of a loan.
So, is there a risk of fixed deposits defaulting?
While very rare, yes, there is a risk of defaults in fixed deposits. Most banks and NBFCs that offer fixed deposits do so to make money, and take care to ensure that they run a profit when lending money, and they can only do so when they know for sure the money they are lending will come back. Anyone who approaches a bank or NBFC for a loan is subjected to a series of thorough checks, including but not limited to gauging their credit scores and looking at their profession and income. In many cases, other individuals (spouse, father or mother) are also asked to co-sign on loans, promising to pay in case the person who borrowed the money is unable to return it. Sometimes, individuals are asked to put something up as collateral – something the bank or NBFC can legally take possession of in case the person defaults on repayment. Also, individuals who have a bad credit history, are unemployed or are not able to offer collateral in certain situations are not offered loans, which helps banks and NBFCs giving out these loans minimise their risk.
To be on the safe side, when opting for a fixed deposit, individuals can check credit ratings of the banks of NBFCs that are offered by various credit rating agencies. These agencies usually take into consideration a lot of factors and assign ratings based on the reliability of a bank or NBFC. One should also keep in mind that fixed deposits are for fixed terms, and if allowed, withdrawing before maturity usually carries a charge. So, before keeping money aside to be put in a fixed deposit, one must be aware that they usually cannot access it until maturity. Fixed deposits on Finserv MARKETS, for example, have a high CIRSIL FAAA rating and an ICRA MAAA rating, ensuring your investment will be safe with them.
Better than nearly-stagnant savings accounts
FDs offer more competitive returns on interest as compared to savings accounts. So, instead of keeping money safe in a savings account, one can keep it safe in a fixed deposit and earn more interest at the same time. Fixed deposits on Finserv MARKETS have lucrative interest rates of up to 8.7%, with special interest rates for senior citizens of 0.35%, over and above the existing rates.
Collaterals for loans
Fixed deposits can be used as collaterals for various loans – to buy homes, vehicles, for education, and can also be used as security for credit cards.
Easy to open
Fixed deposits are hassle-free – easy to open, monitor as well as close, and with the adoption and integration of emerging technologies, it is now easier than ever. Fixed Deposits on Finserv MARKETS offer you a seamless, paperless process which requires minimal documentation and can be easily kept track of.
Most fixed deposits also offer flexible tenures, so one has an option to go for either short- or long-term fixed deposits.
So, in conclusion, while there are defaults in fixed deposits, the chances of them happening are slim as banks and NBFCs carry out extensive due diligence. This is why fixed deposits are a favoured method of keeping money safe and accumulating interest on it at the same time.
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