Fixed Deposit in Current Times – Are They the Best Bet

Fixed Deposit (FD) is a popular investment choice with many, as we consider it as one of the safest investment options that guarantees assured returns post-maturity. FDs offer financial stability when compared to other investments like equities or mutual funds, where returns are based on market performance or the underlying asset and are unpredictable. Stock markets or real estate investments come with a risk of money loss; especially when the stock market crashes or if there is depreciation in property value.

On the other hand, FD is not subject to market risk and hence, especially suited for those with a low risk appetite. Interestingly, FDs had taken a back seat to other asset classes with higher returns like equities or stocks, as the average returns were much higher than what one receives through an FD investment. Nevertheless, due to the unpredictable nature of markets and its potential impact on high return investment options, customers continue to opt for FDs. In a volatile financial market, FD is potentially the most risk-free investment one can invest in. Your money grows at a steady rate with no fluctuations. On the other hand, the tenure period is pre-set, making it a locked asset that you cannot break. Being aware of the potential pros and cons and making an informed financial decision will give you better returns.

Small Finance Banks and FDs

Small Finance Banks (SFBs) play a key role in the priority sector lending space as their main focus is the unserved and underserved segment. SFBs aim at attracting customers in these segments by providing a full range of the best banking solutions so that they are not deprived of any products and services which are enjoyed by other bank customers. The interest rates on FDs in SFBs are much higher in comparison to those offered by commercial banks. These high interest rates serve as a motivating factor for this segment to start investing in a safe option rather than keeping their hard-earned money in lockers at home.

SFBs being new entrants in the market offer higher interest rates than many traditional banks and thereby increase their deposit base. In addition, many SFBs adopt a digital first approach and are investing heavily in latest technologies in order to provide a seamless experience to their customers with services like doorstep banking and use of handheld devices that offer the convenience of anytime and anywhere. These are great privileges to SMEs, MSMEs and the underserved segments in both urban and rural areas. The deposits are used to fund small-ticket loans to mass market customers, which in turn, has helped millions of such customers provide better lives for themselves and their families.

The unbanked population tends to be apprehensive to save their money where they cannot see it. In this case, FD is an attractive investment for them to meet their long-term financial goals while staying clear of risks. SFBs offer interest rates as high as 9% on FDs which makes for a better saving option for them. The unbanked segment may have failed to enter the formal banking system due to a variety of reasons. Sometimes, they feel intimidated and disrespected while encountering the present banking system and therefore, it is an important objective for  SFBs to bring them into the fold and get them accustomed to banking services. We also see a large number of educated people who do not leverage banking facilities, in spite of holding bank accounts. This could be attributed to a lack of knowledge regarding banking facilities and their advantages. Hence, financial inclusion efforts to create awareness are critical. Formal institutions should be charged with educating these individuals about the need to invest money in credible financial institutions and how best to manage their finances. For instance, through Parinaam Foundation’s Diksha programme, we attempt to educate those customers who require guidance to manage their finances.

The Last Words

In conclusion, customers who are risk averse and are looking for a steady and predictable outcome on their savings can consider FDs. Digital adaptability has reduced the turnaround time for various activities offered by SFBs, thus bringing down the costs considerably. Hence, SFBs are able to reduce costs and are able to pass on those benefits to customers in the form of higher interest rates.

Though, while making an investment choice, it is important to not obsess over just the rate of interest. You need to consider all the services provided by the bank in its entirety. Digital solutions, ease of banking, quality and range of banking services should be considered while making a decision to invest.

The author is the Chief Business Officer, Ujjivan Small Finance Bank