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Reinvestment Risk in Bank FDs

Banks keep varying their FD rates and that poses a risk to your investment. A rate of 9% is not only the highest rate offered five years ago, but also one of the highest interest rate levels over the past decade. But what if prevailing rates are on the lower levels at, say, 6.25% – 7%? If the rates go up in future, you will not be able to take advantage of it.

Also, if you had opted for a three-year FD or a one-year FD and gone for renewal, the entire scenario would have been different. You would have had to renew at prevailing rates, which were much lower than your original rate.

Volatility exists in FDs as well, though not as explicitly as in debt Funds. Returns may be fixed with FDs. But what looks attractive now may not look good five years down the line when rate (and inflation) scenarios are entirely different.

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This post first appeared on Prajna Capital - An Investment Guide, please read the originial post: here

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Reinvestment Risk in Bank FDs


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