“Bank Fixed Deposits (FDs) are the safest investment option.” This is a common refrain we hear from our parents, friends and financial advisors. But is it really true? Are bank FDs really as safe as they are made out to be?

The answer – No. While FDs don’t face the volatility risk, unlike stocks, they do have inflation risk and liquidity risk. Let us se what each of these risks entails.

Inflation risk: Inflation is the increase in cost of living. Higher rate of inflation erodes the value of your money, as you need more money to buy the same quantity of items.  Normally the interest rates offered by the banks are lesser than the rate of inflation. E.g. the current rate on bank FDs is around 7-8%. But the current inflation rate is over 10%. So the returns from the FDs are not enough to cover the inflation, thus eroding the value of your investment.

Liquidity risk: FDs up to Rs 1 lakh are insured by Deposit Insurance and Credit Guarantee Corporation. Any amount over this limit is not insured. So if the bank sinks, you end up losing the balance amount. As many people tend to deposit their money in smaller banks, which are at the risk of crashing, they face a higher risk of losing their money.

While these are two major risks, there are other drawbacks like tax and higher lock-in period. You need to understand these risks before you opt for bank FDs. Also ensure you invest in these deposits for short-term as the rates are highest during that period.