Should you invest in Fixed Deposits of small finance banks promising more than 9% returns?

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Ittira Davis, MD & CEO, Ujjivan Small Finance Bank

Fixed Deposit (FD) is a good investment for our customers, especially with the rising rates. FDs provide a safe, constant investment with guaranteed returns. They are low risk and suitable for risk averse investors. Customers can easily invest their money for a specified period of time and earn returns using FDs. FDs also offer better interest rates as compared to savings accounts and other low-risk investments. Customers seeking regular income can benefit from FD.

Soumya Srivastava, CEO of Prayasana Microfinance

1. Should you invest?

For individuals seeking better returns than regular banks, investing in small finance institutions with returns above 9% on FDs can be a suitable option. Before investing, it is important to evaluate the reputation and performance of the bank. Before making any investment selection, investors should also consider their financial objectives and risk tolerance.

2. What are the risks involved?

The risks associated with investing in small finance banks include the possibility of default on payments, liquidity problems, and potential volatility in interest rates. Before investing, you should do your homework and assess the financial position and track record of the bank.

3. What should be my investment strategy?

The portfolio should be diversified among various asset classes and the duration of FDs would be considered in a wise investment strategy. Also, something that should be considered by investors is that higher returns usually come with higher risk.

4. Should I lock my FD in a small finance bank for 80c deduction?

For tax related reasons, it would be beneficial to lock the FD in a small finance bank for 80C deduction. However, the lock-in period should be considered, as early withdrawal may attract charges. Before making a choice, investors should weigh the potential returns against other investment options.

CA Manish Mishra, Virtual CFO

SFB was established with an emphasis on microfinance and small business lending to provide financial services to the underbanked and unbanked segments of the society. They offer deposit products such as savings accounts, current accounts and fixed deposits and are subject to RBI regulation.

Despite the risky nature of investing in SFB’s FDs, the higher interest rates may seem attractive. The financial stability of SFBs may not be as well established as that of larger banks as they are relatively new institutions. Hence, investing in SFBs may involve higher risk.

The 9% interest rate offered now may not be available tomorrow as interest rates offered by SFBs may be subject to change depending on market conditions.

Since the interest on FD is taxable, investors must think about the tax implications of investing in FD. Additionally, unlike some other banks, SFBs cannot offer tax-saving FDs.

For conservative investors seeking consistent earnings, FDs are a low-risk investment option. However, if an investor is seeking higher returns, he can look at alternative investment options such as stocks or mutual funds.

Lastly, some investors may feel that investing in SFB’s FDs is a wise option, but it is important to weigh the pros and cons thoroughly before taking a decision. Additionally, before investing, investors should do due diligence and check the financial health of the SFB.

Sahen Karamchandani, Founder, WealthinIndia.com (Wii Investments Private Limited)

Before making any investment decision, investors should be aware of the risk associated with Small Finance Bank FD giving 9% returns. The biggest risk of investing in Small Finance Bank FDs is credit risk. However, DICGC is a division of RBI which covers all bank deposits up to Rs. 5 lakh, also extends to deposits made with small finance banks. Hence, up to Rs. Rs 5 lakh can be invested without worrying about principal or interest. Any investment amount above this should be looked for an alternate source of investment.

Debt mutual funds are an alternative investment option for investors seeking higher returns. These funds invest in government securities, bonds and other fixed income instruments. Compared to bank FDs, debt mutual funds offer higher returns, hold more liquidity, and the returns are tax-efficient for investors in lower tax brackets.

Juzar Gabajiwala – Director, Ventura Securities

There are 2 decisions to be considered here. First is whether one should opt for section 80C and second is whether to go for Small Finance Bank (SFB). For the first decision, you should opt for section 80C only if the old tax regime is beneficial for you, then only you should opt for tax saving FD. If you are opting for the new tax regime then Section 80C Fixed Deposit will be of no use. Also remember that the section 80C limit will be capped at Rs 1.50 lakh.

The second decision is based on the higher interest provided by the SFB. One can consider it as an investment but must ensure that the amount (principal and interest) does not exceed 5 lakhs. Guarantees provided by the Reserve Bank of India through DICGC up to Rs. 5 lakhs. Also you should visit their website and check whether the bank is listed to be eligible for the insurance cover or not. So both the decisions are independent and should not be linked to each other.

Edul Patel, CEO and Co-Founder of Mudrex

Some small finance banks are offering more than 9% interest rate on fixed deposits (FDs), which may attract investors. However, compared to larger banks, small finance banks may be at higher risk of default due to higher costs and limited capabilities to raise capital. It is essential to research their financial stability and your goals before investing. FD offers guaranteed returns but limited liquidity. Therefore, it is important to assess risk, evaluate goals and do thorough research before investing.

Nehal Gupta, Director, AMU Leasing

Investing in a Fixed Deposit (FD) with a small finance bank offering returns above 9% can be an attractive option for those looking to earn a higher rate of interest than traditional banks. However, it is important to note that higher returns usually come with higher risk. Small finance banks operate with a smaller capital base, and their focus on unsecured lending to at-risk segments of the population makes them more vulnerable to defaults and non-performing assets.

Before investing, it is important to do a thorough research on the financial stability and reputation of the bank. Investors should diversify their portfolio by spreading their investments across different financial instruments and banks. Locking in FDs for 80C deduction is a good tax-saving strategy, but it is important to weigh the benefits against the potential risks.

Ultimately, the decision to invest in a small finance bank FD should be based on individual financial goals and risk appetite. It is advised to consult with a financial advisor to determine the best investment strategy based on your unique circumstances.