Should you invest in fixed deposits of small finance banks promising over 9% returns?
Why consider fixed deposits?
Fixed deposits have always been a popular investment option for individuals who are looking to earn a fixed return on their investment. It is a risk-free option where an individual can invest their money for a fixed period and earn interest on it. Recently, small finance banks have been offering fixed deposit schemes with returns of over 9%.
Understanding small finance banks
Small finance banks are financial institutions that provide financial services to underserved and unserved segments of the population, such as small business units, marginal farmers, and micro and small industries. These banks were established under the RBI’s guidelines to provide banking facilities in rural and semi-urban areas. Small finance banks are regulated by the Reserve Bank of India (RBI) and are subject to the same rules and regulations as other commercial banks.
Risk and returns
Before investing in any financial product, it is essential to understand the risks associated with it. Small finance banks may offer higher returns on fixed deposits, but it is important to note that the risk involved is also higher. These banks cater to the underserved and unserved segments of the population and may not have a long operating history or a wide network of branches.
Small finance banks also carry the risks associated with any other bank, such as credit risk, regulatory risk, and interest rate risk. It is crucial to evaluate the bank’s financial health, history, and credibility before investing in its fixed deposits.
FD insurance
Fixed deposits with banks are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC). DICGC is a subsidiary of the RBI and provides insurance coverage of up to Rs 5 lakh per depositor per bank. This insurance coverage ensures that in case the bank goes bankrupt, the depositor is eligible for the insurance amount.
Factors to consider
When considering investing in fixed deposits of small finance banks, there are several factors that one should take into account.
Interest rates
The higher the interest rate offered, the better the return on investment. However, it is important to check if the high interest rate is sustainable and not just a promotional scheme.
Fixed Deposit Tenure
The fixed deposit tenure is the period for which the investor is willing to keep their money locked in. Longer tenure fixed deposits usually offer higher interest rates but can result in the depositor losing out on other investment opportunities. Shorter tenure fixed deposits may offer lower interest rates but provide more flexibility to the investor.
Bank credibility
Bank credibility is crucial when investing in fixed deposits. It is important to research the bank’s operating history, financial health, and regulatory compliance before investing in its fixed deposits.
Taxation
Fixed deposits are taxable under the income tax act. Interest earned on fixed deposits is added to the individual’s income and is taxed according to the individual’s income tax slab. It is important to evaluate the tax implications before investing in fixed deposits.
Conclusion
Investing in fixed deposits of small finance banks can provide higher returns on investment. However, it is essential to evaluate the risks and rewards associated with it. A thorough evaluation of the bank’s operating history, financial health, and credibility is crucial before investing in its fixed deposits. It is also important to consider the interest rates, fixed deposit tenure, and taxation implications before investing. Fixed deposits can provide a guaranteed return on investment and are a suitable option for risk-averse investors.