Fixed deposits have always been a popular investment choice among Indian investors due to their fixed rate of interest, stability, and low-risk nature. However, as interest rates on fixed deposits declined, some investors turned to other options such as equities, which offered the potential for higher returns but also carried greater volatility and uncertainty. Now that interest rates on fixed deposits are rising again, investors are returning to these investments as a source of predictable, stable returns. Additionally, the default risk safety of fixed deposits is ensured up to Rs. 5 lakh against by the Deposit Insurance and Credit Guarantee Corporation (DICGC), further adding to their appeal.
What is default risk? When you invest in a fixed deposit with a bank, there is a risk that the bank may not be able to fulfill its obligation to repay you the principal amount and the agreed upon interest. This risk, which is taken on by the investor, is known as default risk. In other words, default risk is the risk that the bank will default on its promise to repay the fixed deposit. |
How is the limit of Rs. 5,00,000 determined?
Each depositor’s both principal and interest is insured, up to a maximum of Rs. 5,00,000 held in the same capacity and same right as of the date of the bank's liquidation or cancellation of its license, or the date on which a scheme of amalgamation, merger, or reconstruction goes into effect. Here it becomes important to understand what does “same capacity and same right” mean.
If an individual has multiple deposit accounts with one or more branches of a bank, for example, a savings or current account and one or more fixed or recurring deposit accounts, these accounts are considered to be held in the same capacity and same right. The balances in all of these accounts will be combined, and the individual will be insured for up to Rs. 5,00,000.
However, if the individual opens another account in the bank as a partner of a firm or director of a company or opens a joint account with his wife, such accounts will be considered to be held in different capacity and different right. Therefore these accounts will be separately insured up to Rs. 5,00,000.
For example, Mr. Goyal wants to invest Rs. 10,00,000 in a fixed deposit. Then consider the following scenarios:
| Fixed Deposit Amount | Total Deposits | Deposit insured up to |
|---|---|---|---|
Mr. Goyal singly | 10,00,000 | 10,00,000 | 5,00,000 |
Mr. Goyal jointly with Mrs. Goyal | 10,00,000 | 10,00,000 | 5,00,000 |
Mr. Goyal singly Mr Goyal jointly with Mrs. Goyal | 5,00,000 5,00,000 | 5,00,000 5,00,000 | 5,00,000 5,00,000 |
If Mr. Goyal opens a fixed deposit in his own name of Rs. 10,00,000 then Rs. 5,00,000 will be insured. However, if Mr. Goyal opens two fixed deposits, one singly of Rs. 5,00,000 and one jointly with Mrs. Goyal of Rs. 5,00,000 this will provide insurance coverage of Rs. 10,00,000 as the deposits will be held in different capacity and different right.
Further, if individuals open multiple joint accounts in which their names are listed in a different order or with different group of people, each account will be considered as held in a different capacity and with different rights. As a result, each of these accounts will be eligible for separate deposit insurance coverage up to INR 5 lakhs. Consider the examples of accounts opened by Mr. Goyal in table below:
1. | Savings Account and Fixed deposit | First A/c holder - Mr. Goyal Second A/c holder - Mrs. Goyal | Maximum Rs. 5,00,000 |
2. | Savings Account and Fixed deposit | First A/c holder - Mrs. Goyal Second A/c holder - Mr. Goyal | Maximum Rs. 5,00,000 |
3. | Fixed deposit | First A/c holder - Mr. Goyal Second A/c holder - Mr. Ahuja | Maximum Rs. 5,00,000 |
4. | Account at Branch X of the bank | First A/c holder - Mr. Goyal Second A/c holder - Mr. Ahuja Third A/c holder - Mr. Singh | Maximum Rs. 5,00,000 |
5. | Recurring deposit | First A/c holder - Mr. Goyal Second A/c holder - Mrs. Goyal | The amount will be clubbed with account 1. above |
6. | Account at Branch Y of the bank | First A/c holder - Mr. Goyal Second A/c holder - Mr. Ahuja Third A/c holder - Mr. Singh | The amount will be clubbed with account 4. above |
What if deposits are held in two different banks?
Deposits held in different banks are insured separately. For example, if Mr. Goyal held two fixed deposits of Rs. 5,00,000 in two different bank accounts amounting to a total of Rs. 10,00,000 in deposits, his whole amount of Rs. 10,00,000 would be insured.
Preservation of capital
The priority of an individual choosing to invest in a fixed deposit is capital preservation. One way to do this is to diversify your investments by not putting all of your funds in a single fixed deposit. Instead, you can spread your deposits across different accounts or banks to reduce risk. For example, you can open multiple fixed deposits in the same bank, each with a balance of up to INR 5 lakhs, or you can open fixed deposits in different banks, either in the same capacity and same rights or in different capacity and different rights. This helps to protect your capital by reducing the impact of any potential losses in a single account or bank.
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