Why You Need To Be Careful When Investing In Fixed Deposits?

This morning an article pointed to the fact that as many as 1,00,000 deposit holders of DHFL risked losing their fixed deposits.

At one time, DHFL was among the institutions that offered almost the best interest rate on fixed deposits. Mostly, retired folk and the elderly who look for higher interest rates to sustain themselves can be lured by high interest rates. Just imagine, if you have put all your savings in a single deposit or you have put a substantial amount what could be the consequences.

Why You Need To Be Careful When Investing In Fixed Deposits?

In the PMC bank fraud thousands of investors are struggling to get their money back and nobody seems to be certain what could happen. Here again, as it seems currently, many investors are likely to lose money. According to reports in just one single area of Mulund in Mumbai as many as 15,000 deposit holders face the risk of losing money.

Even credit ratings do not work

At one time, credit rating agencies had rated the fixed deposits of DHFL very highly. Today, as you look at the institution, you can question the credit rating agencies on "what happened".

However, things change so fast in the financial world, even credit rating agencies are caught unaware.

The only thing to look for before investing in FDs

If you are looking at Fds, forget the credit rating, the first thing that you should look for is the pedigree or group backing. Let us give an example. DHFL was a standalone institution and the only business it was into was those linked to the financial sector.

Now, consider a fixed deposit from Bajaj Finance and Mahindra Finance. These are backed by groups that have been in the auto sector for decades, even before many folks were born. They have a collective group backing, with solid businesses in place. So, first look for group backing and forget the credit rating. Currently, both, Mahindra Finance and Bajaj Finance offer you very good interest rates on fixed deposits.

Even PNB Housing Finance and LIC Housing Finance offer very good interest rates on their fixed deposits. These are both government backed institutions, so the worries are far lesser.

The problem right now is that interest rates offered by banks is so low, that most folks are disinterested. For example, the maximum interest rate that SBI offers is just 6.5 per cent. This leaves investors tempted to look beyond bank deposits, and here is where caution maybe thrown to the winds. Again, as we wish to re-iterate that for the moment you should even forget the ratings and go for companies with a strong pedigree. It's very important to discern correctly before applying in fixed deposits as NBFC deposits are not secured.

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