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How to choose the most suitable fixed deposit by balancing risk and returns

Split your FDs among 3-4 banks, with a mix of NBFCs, small finance banks and commercial banks to maximize your returns and minimize your risks

April 28, 2021 / 02:49 PM IST

Financial Wisdom says bank fixed deposits (FDs) are the safest investments with low returns, which may sometimes not cover for inflation. The observation is partly right if you consider FDs of large commercial banks for investment. However, today, there is a wider choice of FDs available from private sector, small finance and payment banks that give high returns. Further, there are many non-banking finance companies (NBFC) offering FDs at high interest rates.

The highest FD rate today is 7.75 percent. Adjusted for an average inflation rate of 4-4.5 percent, it still leaves you with a scope of earning a real return of 3-3.5 percent with zero or minimal risks on your invested money.

So far, so good. But, the next logical question that comes to mind is that “Are these FDs still as safe as the conventional FDs of large banks such as State Bank of India (SBI)?” Let’s evaluate different types of FDs.

Also read: SBI warns its customers to beware of online fixed deposits fraud

Types of FDs


There was a time when our good old public sector banks such as SBI and Bank of Baroda were the only credible options for fixed deposits. Opening of the banking sector and the introduction of new categories of banks have gradually expanded the options available. So now, you have an option to choose from FDs of private sector banks, small finance banks and payments banks. On top of it, NBFC FDs have also emerged as a popular alternative with attractive interest rates from large and well-established NBFCs.

Two aspects to look at while taking a decision to choose your FD are:

Level of insurance coverage available for individual depositors

All category of banks listed in the table above are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, which provides deposit insurance of up to Rs 5 lakh (Rs 2 lakh for payment banks) for every individual investor in a single bank. It means that even if the bank fails, the depositor’s money of up to Rs 5 lakh (Rs 2 lakh for payment banks) is safe. This essentially means that the deposit money of small depositors is completely safe. NBFC FDs are not covered under DICGC and you need to solely rely on the credit rating of the NBFC as assigned by approved credit rating agencies.

For larger deposit amounts, the next question becomes highly relevant.

Risk of failure and likelihood of government rescue

Risk of failure of a bank is dependent on the size and financial stability of the banks. Larger the entity and stronger its stability, lower are the risk of failure. Also, in case of an unexpected failure of large banks such as the Yes Bank debacle, there is a strong likelihood that RBI will step in to protect the interests of all depositors. Credit rating agencies also consider size and financial stability while giving a rating to a NBFC. Hence, a AAA-rated NBFC corresponds to the highest safety with next to zero chances of default on deposits

Also read | COVID-19 lockdown: Opening a fixed deposit online made easy

Which are the top ten highest paying FDs in 2021?

If you look at the top ten highest paying FD providers in 2021, it is a mix of small finance banks, new private sector banks, public sector banks and NBFCs. Bank FDs of up to Rs 5 lakh are completely safe as covered under DICGC. Bajaj and HDFC are the two largest NBFCs in India, with a rating of AAA corresponding to the highest safety and hence, the risk of default and failure is negligible.

Also read: Yes Bank and Suryoday Small Finance Bank offer the best rates on three-year FDs for senior citizens

How can you maximize return on your FD portfolio?

Keep in mind the two basic principles of investment while working on achieving a perfect risk-return trade off:

Do not put all your eggs in one basket

If possible, split your FDs among 3-4 banks with a mix of NBFCs, small finance banks and commercial banks to maximize your returns and minimize your risk.

Risk comes from not knowing what you are doing

The famous quote from Warren Buffet very aptly sums the importance of research while taking a decision to invest. Compare FDs from different providers as well as across different tenures. Pick the ones where you have a good balance of return and risk. If possible, book FDs in the name of your senior citizen parents to get that extra 25-50 bps income.         
Shalini Gupta is Co-founder and Chief Strategy Officer,
first published: Apr 28, 2021 02:49 pm

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