In era of defaults, diversification can help you secure your FDs
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In era of defaults, diversification can help you secure your FDs

Investors who prefer fixed deposits are mostly conservative investors. Majority of them are in the higher age bracket and deploy their life savings in fixed deposits

  • December 6, 2019  
  • |  
  • UPDATED   23:11 IST
In era of defaults, diversification can help you secure your FDs

The old saying 'don't put all your eggs in one basket' could not be more relevant than in the current scenario. When it comes to investing in fixed deposits, many investors have learned a hard lesson from the ongoing crisis in the PMC Bank and bankrupt DHFL. Many of the PMC Bank account holders are unable to service their EMIs, as they could not transfer money from the PMC Bank. All their savings were kept in the PMC Bank only. Similarly, people who had invested in corporate FD of DHFL to get higher returns are unable to withdraw their deposits as the company has defaulted on its repayments.

Investors who prefer fixed deposits are mostly conservative investors. Majority of them are in the higher age bracket and deploy their life savings in fixed deposits. Some of them go for deposit in small banks, co-operative banks and corporate FDs to get higher return without any perceived risk. Some investors with greater risk appetite invest mostly in equities. They also invest some part of their debt investment into fixed deposits for stable returns. These investors prefer safety. They are fine with moderate returns. However, the situation becomes worrisome when investors realise that their safe choice (FDs in banks or corporate FDs) was not so safe.

In case of banks, the only respite that the bank depositors have is an insurance cover of Rs 1 lakh offered by Deposit Insurance and Credit Guarantee Corporation (DICGC) if the bank fails. It doesn't matter how large your deposit is, you will get only Rs 1 lakh back if the bank goes bust. This insurance cover of Rs 1 lakh takes into account all deposits held in saving accounts, current accounts, recurring deposits, and FDs held in the same right and capacity. Rs 1 lakh coverage is not enough given most savers will have more than Rs 1 lakh balance in the bank account. So, should you avoid investing in fixed deposits? No investment is risk free but you can understand the risk better and manage it to your advantage.

Divide your deposits in 2-3 banks

If you keep your deposits in different banks, you will be eligible for Rs 1 lakh cover separately with each bank. Many people do have more than one bank account. However, some of them keep all their bank deposits in only one preferred bank. This may not be a good strategy. If you have higher amount of deposits, it is always better to divide them among two-three banks so that you never face liquidity crunch and find yourself unable to withdraw your savings as happened with customers in the PMC bank.

Divide your deposits in different capacity in the same bank

Even with the same bank you may have a higher insurance cover. If you hold different accounts in the same bank in different right and capacity, you can be eligible for Rs 1 lakh cover separately for each. For instance, if you hold an individual account and one joint account with person A and another joint account with person B then all these three accounts will enjoy insurance cover of Rs 1 lakh separately. Similarly if you hold an account as a director of company or partner of a firm or a guardian of a minor then all these accounts will also enjoy Rs 1 lakh insurance cover separately.

If you have bigger amount to be invested in bank fixed deposits you can divide these into different banks and different types of accounts to diversify your deposits and be eligible for Rs 1 lakh insurance cover on each account.

Keep smaller deposits in corporate FDs

Ideally, you should not invest in corporate FDs unless you understand all risks. Even those with risk-taking ability should do it in a well-diversified way, staying away from investing all their savings in a single corporate entity. Higher the return more is the risk. Therefore, you should keep your exposure lowest in corporate entities offering higher returns. You should also avoid locking your funds for long-term as shorter tenures will give you opportunity to review and adjust your exposure on each renewal as per new emerging developments.

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