We all resort to fixed deposits (FD) or savings accounts to keep our hard-earned money safe throughout our lives. The general belief is that the money kept in the bank is completely safe and no harm can come to it. But the reality of the financial world is slightly different from this perception. Unfortunately, if your bank goes bankrupt or collapses due to an economic crisis, your entire deposit is not protected. Under a special rule, you may have to suffer huge loss. Let us understand how safe your hard-earned money really is and what rules apply to it.
How much money is completely safe?
The Deposit Insurance and Credit Guarantee Corporation (DICGC) is responsible for providing security to depositors’ money within the banking system in India. This institution provides insurance cover to every depositor, but its maximum limit is fixed. This insurance cover is applicable only on deposits up to Rs 5 lakh. The thing to note is that in this limit of Rs 5 lakh, your savings account, current account, fixed deposit (FD) and recurring deposit (RD) are all included. In simple words, if you have deposited a total of Rs 10 or 12 lakh in different accounts of a single bank, then in case of bank failure you will get back only Rs 5 lakh. The remaining amount remains at direct risk.
What are the rules on multiple FDs in the same bank?
There is a misconception among many investors that if they divide a large amount into different FDs, their money will become more secure. For example, instead of making a single FD of Rs 10 lakh, some people make five separate FDs of Rs 2 lakh each. But the truth is that even if all these FDs are present in the same bank, the total insurance cover will be limited to Rs 5 lakh. Simply increasing the number of accounts does not guarantee the security of your investment.
How to save your entire amount?
If your total deposited capital is more than Rs 5 lakh, then it is important to take strategic steps to keep it safe. The most effective and easiest way to do this is to divide your money among different banks instead of keeping it in one bank. Suppose you have a savings of Rs 15 lakh, then you can deposit Rs 5 lakh in Bank ‘A’, Rs 5 lakh in Bank ‘B’ and the remaining Rs 5 lakh in Bank ‘C’. By doing this your entire Rs 15 lakh will come under the insurance coverage of DICGC.
Understand the risks of small banks also
Apart from switching banks, you can also easily increase the scope of protection by using the names of different members of your family. For example, you can invest Rs 5 lakh in your name, Rs 5 lakh in your spouse’s name and Rs 5 lakh in a joint account. Legally, each account will get the benefit of different insurance cover.
Nowadays many small banks and small finance banks offer higher interest rates than normal banks to attract customers. The returns on investment in these banks are good, but the possibility of risk in them is also proportionately higher. Therefore, it may prove to be a wise move to avoid keeping more than Rs 5 lakh in such small institutions to avoid putting your entire deposit at risk.