Bank FDs: Some things you need to look at

Fixed deposits (FDs) of banks remain one of the most popular forms of investments among retail investors. The reasons for the popularity is ease of opening an FD account, the relative safety provided by the banks, assurance of fixed returns, presence of bank branches in the neighbourhood for easy withdrawal or renewal of FDs, online facility to open FD account by transfer of amount from the savings bank account, etc. However, investors need to be careful while opening FD accounts as these are also subject to default risk and interest rate risk. So, here are some factors that you need to take into account so as to ensure safety of your capital and stability of returns.

Financial health of the bank: The financial health of the bank in which an investor wishes to open an FD needs to be sound. It would be advisable to take a look at the Profit & Loss Account and Balance Sheet of the bank to make sure that the bank is in the pink of financial health.

Rate of interest: Investors are usually tempted to go for a bank offering higher rate of interest on FDs, which is all very well in the case of banks having sound financial health. But a bank with shaky financial position may offer much higher rate of interest than other banks to lure investors into opening FDs with the bank. It is not wise to open an FD with such a bank as it would expose the investor to the risk of loss of capital. 

Tenure of FD: This should be determined by the liquidity needs of the investor as the bank allows premature withdrawal of FDs only after levying a penalty of 0.5%-1% and pays a lower rate of interest for which the amount remained invested. 

Interest payment: The investor has the option to choose the frequency of interest pay-outs, such as monthly, quarterly, half-yearly or annually or one can choose cumulative payment of interest and principal on maturity. This would depend on the cash flow requirements of the investor.