Most people in India consider fixed deposits to be the safest investment. Generally, people prefer to make FD only in big and famous banks, because they feel that a big bank is more secure. But the truth is that the security of FD is not determined by the name of the bank but by the rules of deposit insurance.
What is the ₹5 lakh rule?
The safety of deposits in banks is done by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This institution provides protection up to a maximum of Rs 5 lakh per bank to every depositor. This Rs 5 lakh includes both principal and interest. This rule applies equally to all banks. Be it a big government or private bank or a small small finance bank. That means the size of the bank does not matter, the insurance limit is the same.
Suppose you have kept an FD of Rs 7 lakh in any one bank. If there is any crisis on that bank, then DICGC will guarantee the amount only up to ₹ 5 lakh. The remaining amount of ₹2 lakh may be at risk or there may be a delay in getting it. If a regulatory moratorium is imposed on a bank, there may be a ban on withdrawing money for some time. During that time the interest may also stop and it may take time to get the insurance payment.
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What is the correct way?
Experts believe that it is wise to divide your money among different banks. FD of less than ₹ 5 lakh should be kept in every bank. With this, your entire deposit amount will be covered under insurance and the risk will be reduced.
Why do small banks pay more interest?
Small finance banks often offer 0.2% to 0.7% more interest than big banks. In many cases, these banks are giving returns of 7.5% to 7.9% on FD of 1 to 5 years. Small banks want to attract more deposits to expand their business, so they offer higher interest rates. But this does not mean that they are more risky. They also work under RBI rules and are covered by DICGC insurance.
small rate has big impact
Suppose you have made an FD of ₹ 4 lakh for three years. If the interest rate is 7.2% instead of 6.5%, you can get approximately ₹ 9,600 more on maturity. If you do this in multiple FDs, the total benefit can increase significantly.
FD is not good for emergency fund
FD is not completely liquid. If there is any restriction on the bank, it may be difficult to withdraw money at the time of need. Therefore, for emergency funds, options like liquid or ultra-short duration funds may be better.