Rates aren't only important in FDs

Divide the total amount to invest in different tenures and invest in established banks

Shopping for the best interest rates among fixed deposits is a common phenomenon, especially among the risk-averse. But it need not always be the best idea. For instance, 64-year old Dilip Joshi who lost Rs 2.5 lakh by investing in fixed deposits (FDs) of a co-operative bank for higher rates. Unfortunately, the co-operative bank in Nagpur shut down and he got back only the mandatory Rs 1 lakh from the Deposit Insurance and Credit Guarantee Corporation.

But Joshi has always favoured smaller or co-operative banks because of 200-300 basis points extra and invested substantial amounts in their FDs. No wonder, experts prefer scheduled banks. Says Sanjay Agarwal, senior vice-president and group head, retail business & technology solutions group at Arcil, that scheduled banks are relatively safer than co-operative banks.

According to reports in 2012-13, as many as 13 co-operative banks failed. These included, Bhandari Co-op Bank, Solapur Nagari Audyogik Sahakari Bank, Siddhartha Sahakari Bank and Bhusawal Peoples Co-op Bank. Interest rate, as a result, cannot be the prime reason for choosing a bank.

Experts say even now there are many, especially the self-employed who have large savings and deposit accounts with co-operative banks. They reason that it is easy to bank with co-operative banks as you tend to have a personal relationship with them and their staffs, which is not the case with scheduled banks. Warns certified financial planner Suresh Sadagopan: “But if one does have an account in such banks, he/she should not make deposit of bigger amounts because it can be risky,” he adds.

Also, do not keep all eggs in one basket, suggests Agarwal of Arcil. If you have Rs 3 lakh to invest, split it into three to four investments across different banks. This will not only safeguard your money but will also make sure you don’t have to break a big deposit in case of an emergency. This way you will have to pay the premature withdrawal penalty for a smaller sum that is needed and the rest of the money stays invested.

The biggest risk that FD holders face is the risk of getting locked in for a long tenure at a low rate. Therefore, it helps to build a ladder of fixed deposits which have different tenures, suggests Sadagopan. If you have Rs 3 lakh to invest, split the amount in four deposits of Rs 1 lakh each for one, two, three and four years. When the one-year deposit matures, you could reinvest the maturity proceeds at a higher rate for a longer tenure also. This averages the highs and lows in interest rates over a period of time. This will also ensure liquidity because you will have one deposit maturing every year. He adds that it will help to also diversify investments across fixed income products lie debt mutual funds, highly-rated company deposits, tax-free bonds and so on.