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

One of the most popular investment vehicles is fixed deposits. Especially in India, our older generation has also been investing money because they think it is the safest way to see your money grow. There are various investment options available in today's dynamic world. FD's indeed offers lower returns; however, they are considered safest because the interest rate on fixed deposits remains the same throughout the tenure irrespective of the market condition. While other forms of investments, like shares, constantly fluctuate concerning market changes. Almost all the financial institutions in India offer fixed deposits, but the interest rate is different for all. The highest FD rate offered is 7.75%. Adjusted for an average inflation rate of 4-4.5%, it still leaves you with a scope of earning a real return of 3-3.5% with zero or minimal risks on your invested money.

But the next big question which arises is, are all the FD's safe? Whether you invest in a public sector bank, private sector bank or NBFC/HFC? Let's find out an answer for the same:-

Gone are the days when good old public sector banks such as SBI and PNB were the only credible option to invest the money. In the current times, NBFC FDs and small finance banks have also emerged as a popular alternative with attractive interest rates, and with the opening of so many private banks, NBFCs and small finance bank investors have a pool of options to select from according to their needs.

When you decide to open an FD account, these are the two aspects that one should always look for:-

• Insurance coverage: How much insurance coverage the bank can offer is a big question which one should find the answer for. All the banks such as public sector, private sector, small finance and payments bank are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, which provides deposit insurance of up to ₹ 5 lakh. In contrast, payments banks are covered with ₹ 2 lakh for every individual investor. Meaning, if the bank fails to pay the money at the end of the tenure, DICGC will pay the money, making small investments completely safe. However, NBFC FDs are not covered under DICGC, so you need to rely on the credit rating of the NBFC solely for them. They are ratings by approved credit rating agencies like ICRA, CRISIL etc.
• Risk of failure and likelihood of government rescue: It depends on the bank's financial stability and size. The risk of failure is low if the bank is significant and a renowned entity. The financial stability and size of the organization are also checked by the credit rating agency while rating an NBFC. An NBFC which has received an AAA rating means that it has the highest safety with zero chances of default on deposits. Even if there is a default, like Yes Bank, RBI will protect the depositor's interest.

Top 10 Highest Paying FDs in 2021

The top ten highest paying FD list is a mix of private sector banks, public sector banks, NBFCs and small finance banks. 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.

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. The top two in the list are Jana Small Finance Bank (Small finance bank) and Bajaj Finserv (NBFC), out of which Jana Small Finance Bank's deposit is insured by DIGCG, and Bajaj Finserv has a rating of AAA corresponding to the highest safety and hence, the risk of default and failure is negligible.

Additional Read: Compare Fixed Deposit Rates

How can you maximize return on your FD portfolio?

Two basic principles that everyone should keep in mind while investing money, especially to achieve a perfect risk-return trade-off:

• Do not put all your eggs in one basket- A wise decision is to split your FDs into 3-4 banks. For better returns, it should be a mix of NBFCs, commercial banks and small finance banks. This way, the risk is minimized, and your wealth can earn maximum returns.
• Risk comes from not knowing what you are doing- To be able to find a good balance between risk and returns, research thoroughly. Comparison of FD's from different banks for different tenure is very crucial. Look at the other factors like tenure, rating, insurance coverage, and not the only interest rate.

Bottom line: Each person has their risk appetite; while some people are comfortable in investing in shares, other people need a safer option for their savings to invest. For the latter kind of people, a fixed deposit is the most suited option. Both banks and some NBFCs provide the facility of fixed deposits. To maintain a good balance between risk and return, one should not invest all their money with one financial organization.