ET Wealth Online explains what the best way is to manage investment into fixed deposits with safety to ensure a maximum return in the future.
While evaluating the safety of their FD investment the first thing investors need to focus on is how safe and reliable the bank is. Do remember that deposits in scheduled banks, which includes small finance banks, are insured under the RBI’s deposit insurance scheme to the tune of Rs 5 lakh. This insurance includes both the principal and interest amounts. Deposit insurance cover is provided by the Deposit Insurance Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI.
It covers depositors of all commercial banks and foreign banks operating in India, state, central and urban co-operative banks, local area banks, and regional rural banks provided the bank has bought the cover from DICGC.
Why is it important to insure your fixed deposits?
Deposit insurance is a protection cover for deposit holders in a bank when the bank fails or is put under moratorium by the RBI due to any perceived trouble. As per DICGC rules, each depositor in a bank is insured by up to Rs 5 lakh for both the principal and interest amount on deposits held by her in that particular bank. This includes all deposits held by the depositor in current accounts, savings accounts, fixed deposits, recurring deposits, and so on.
How much should an investor invest in fixed deposit?
For example, if an individual had opened two fixed deposits (cumulative pay-out options) with a principal amount of Rs 2 lakh each in the same bank. The interest rate is 8.75 per cent and the tenure will be for 3 years. After maturity, the depositor will get Rs 2,59,301 from each of his fixed deposits where the interest will be Rs 59,301. So, the total return from two fixed deposits will be Rs 2,59,301+ Rs 2,59,301= Rs 5,18,602. Now if the bank fails, the depositor will only be eligible to get Rs 5 lakh from the bank.
|Investment in FD|
|Principal Amount||Rs 2,00,000|
|Interest on Maturity||Rs 59,301|
|Total return from two FDs on maturity||Rs 5,18,602|
Depositors must remember that the limit of this insurance cover is Rs 5 lakh.
So, if the principal amount is Rs 5 lakh, then the investor will only get this amount back and not the accumulated interest on the deposits if the bank fails. However, if the principal and accumulated interest taken together is Rs 5 lakh or less, the investor will get the total amount back as the claim amount, if the bank fails.
Do remember there are two types of fixed deposits based on the mode of interest pay-out — cumulative FDs and non- cumulative FDs. Non-cumulative fixed deposits pay out interest to investors at regular intervals. These pay-outs could be on a monthly, quarterly, half-yearly or yearly basis. Investors have the option to choose the period of interest pay-out at the time of opening their fixed deposits. For non- cumulative FDs, you can invest up to Rs 5 lakh in the bank as you get the interest at regular intervals. However, for cumulative fixed deposits, you need to be careful that the total of the principal amount and accrued interest does not exceed the threshold of Rs 5 lakh, the amount insured by the DICGC. So, take note of the current interest rate and tenure and do calculate the return on maturity before investing.
What is the rule for investing at different branches of the same bank?
At present, the insurance cover offered by the DICGC covers all different accounts of one depositor held with different branches of the same bank for a maximum of Rs 5 lakh. Therefore, if an investor has more than one fixed deposit at the different branches of the same bank, then, too, he or she will be insured for only Rs 5 lakh.
Are deposits in different banks separately insured?
Yes. If investors have deposits with more than one bank, the deposit insurance coverage limit is applied separately to the deposits in each bank, as per DICGC rules.
What investors need to keep in mind while investing
While parking their hard-earned money in fixed deposits to get a high return, depositors must remain careful that the total return from all the deposits — savings accounts, current accounts, fixed deposits, recurring deposit deposits — do not exceed a maximum of Rs 5 lakh. Echoing this, Gaurav Aggarwal – Senior Director, Paisabazaar, said, “Depositors should compare the interest rates of fixed deposits offered by as many banks as possible before opening their fixed deposit. As these small finance banks and private sector banks have been classified as scheduled banks, their depositors are covered under the Depositor Insurance Program of DICGC. Depositors can spread their fixed deposits among multiple banks offering higher fixed deposit yields in such a way that the cumulative deposits with each of those banks do not exceed Rs 5 lakh.”
You can also enhance your insurance cover and enjoy a total cover of Rs 65 lakh or more with the same bank by depositing money in FDs through multiple accounts with different rights and capacities.