Fixed deposits

Fixed deposits are in disrepute lately because number of defaults but have been the preferred investment vehicle for a large number of investors. Fixed deposits are borrowings by banks and companies which are not backed by any security or collateral. As such, if the borrower defaults, you can kiss your money goodbye.

Bank fixed deposits A fixed deposit (FD) with a bank is a borrowing by the bank. The problem with FDs is that they are not liquid and you will lose your interest if you encash them earlier than the duration of the fixed deposit. Fixed deposits also pay interest rates lower than money market funds which are extremely liquid and as safe. Banks are now making fixed deposits much more flexible. Some banks open your fixed deposits in small denominations (sometimes as low as a rupee) so that if you withdraw part of your money, you don't lose interest on your entire deposit. Don't forget, bank fixed deposit are borrowings by the bank without any security. Bank fixed deposits are not insured though banks have rarely defaulted.

Company fixed deposits These are nothing but borrowings by companies without any security or collateral. Thousands of investors have burnt their hands with these investments. Does anyone give you funds without security? Then why should you. Keep away from these instruments. If you have been cheated, file a complaint with the Company Law Board along with a form (called a Form 4 don't ask why) which enables you to get back some or all of your investments if the Company Law Board is ever able to recover the deposits from the company. As a practical matter, it's a long shot few defaulting companies pay up.