Investing ?15 Lakhs in Fixed Deposits with Small Finance Banks in India: A Comprehensive Guide

The question of where to invest ?15 lakhs has been on many people’s minds, particularly when it comes to fixed deposits (FDs) with small finance banks in India. This article aims to provide a comprehensive guide to help you make an informed decision and choose the best investment strategy for your financial goals.

Understanding the Risks

The current economic environment in India, marked by high unemployment and an increase in bad loans, underscores the importance of assessing the risks associated with investments in small finance banks and co-operative banks. According to financial experts, even FDs issued by small finance banks carry a high degree of risk since they may not have the robust financial backing that public sector banks do.

Alternative Investment Options

One alternative is to consider investing with the Post Office, which has a history of stability and trust, or to allocate the investment across multiple banks. This diversification strategy is recommended to mitigate the risk of putting all your money in a single bank.

Trust in Reputable Banks

While small finance banks are a relatively new concept in India, they are yet to prove their mettle. For a secure investment, public sector banks like the State Bank of India (SBI) are a trusted choice. These banks have a proven track record and a strong public sector foundation, making them a safer option. However, as with any investment, it is advisable not to put all your eggs in a single basket.

Risk and Insurance Coverage

FDs with insurers cover you up to ?1 lac. While this offers some protection, the remaining amount lacks insurance coverage. For instance, if you invest ?15 lakhs, only ?1 lac is insured, leaving you with ?14 lakhs at risk. This is a significant reason to consider alternatives to small finance banks.

Investment Returns and Strategies

While fixed deposits with banks typically offer returns around 7.5%, the real rate of return takes into account the effects of inflation. In the current financial climate, the real rate of return after accounting for inflation may be as low as 3%. This low return, combined with the tax implications, makes fixed deposits a less attractive option.

Debt Funds as Alternatives

Given these challenges, investing in debt funds and credit risk funds can be a more lucrative option. Mutual funds such as the ICICI Credit Risk Fund and HDFC Low Duration Fund are recommended for a three-year time horizon. These funds aim to provide stable returns with a higher expected rate of 8%, and post-tax returns could be as high as 7.8%. Over three years, this could translate to an overall return of ?18.79 lakhs from an initial investment of ?15 lakhs.

Diversification and Risk Mitigation

Dividing your investment into a mix of bank FDs and liquid and debt funds can be a prudent strategy. For example, you could invest half in a bank FD for safety and keep the other half in diversified liquid and debt funds. This approach can provide both safety and growth potential while allowing you to monitor your investments regularly.

Long-term Investments for Higher Returns

If you have a longer time horizon of seven years, equity mutual funds can offer a significantly higher return, around 12%. Given the initial hesitance in investing in equity mutual funds, a strategy of starting with small amounts and gradually increasing your investment can help build confidence and experience.

Final Considerations

In the current political scenario, it is wise to be cautious. While previously there was a belief in government intervention to protect bank depositors, the present situation has led many to advocate waiting for any increase in the deposit insurance limit from the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is currently ?1 lac. Alternatively, choosing a bank with a strong balance sheet allows you to invest with a degree of confidence.