We opt for Bank deposits because they offer:
- safety and
- guaranteed returns.
Bank deposits can be Fixed Deposits, Recurring Deposits, and Bank balances in Savings or Current accounts.
I believe that there is no such financial product where it is completely risk free. Bank Deposits are no different. What if a bank goes bankrupt? What happens to the investors’ deposits?
If a bank defaults or goes bankrupt then each depositor in a bank is insured up to a maximum of Rs.1,00,000 only (Rupees One Lakh) for both principal and interest amount held by him. If an individual opens more than one deposit in one or more branches of the same bank, then all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and maximum insurance cover is available upto rupees one lakh.
Non-Performing Assets
Non-Performing Assets are popularly known as NPA.
While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA).
You should be aware that only Rs 1 lakh of your savings is insured. This limit has not been revised since long. As an investor you should also know the worst case scenario in case something untoward happens. I am not saying that they are unsafe, but the rising instance of non-performing assets (NPA) in some banks is a major cause of concern. NPAs are like bad debts in our business which are unlikely to be recovered.
It is true that nationalised banks are government owned and large private banks are too big to fail, but in fixed deposit, shifting it to other banks for ½ or 1% more can prove fatal. While it is important to have debt in your overall investment portfolio, it should be limited to only a certain percentage of your total assets.
This would depend on your age, time horizon of your goal and your risk profile. Nobody can deny the importance of safety, but you should also look for and evaluate other options which are equally safe but can help you generate better returns or can provide you better tax advantage.
So is there any alternative to bank fixed deposits without taking any extra risk? The answer is yes. For the short term, you can invest in ultra short-term funds or short-term debt funds or FMP schemes of mutual funds with a time horizon of 3 years plus to generate higher returns compared to fixed deposits.
Arbitrage funds are another good option for period of one year plus. The main reason why these funds are not popular is that they are market related and returns are not guaranteed like fixed deposits and postal schemes
We have allowed the banks to earn from our savings and also the government to become our partner in profit for years, but with the changing times, you should also change your investment pattern. The scenario is not similar to that faced by your father or grandfather as we have moved out of the joint family system.
The high cost of foods, along with the rising cost of education and health can spoil your financial future if you don’t plan your investment. It is time to rethink and act as early as possible. It is always advisable to prepare a financial plan for the family before starting any investment which can solve many problems.
