Bank Deposits Offer Stability But Come With Tax And Credit Risks

Bank deposits are a key component of a goal-based portfolio, offering visibility of cashflows and moderating reinvestment risk. However, they come with associated costs, including tax on interest income at the marginal tax rate and credit risk, prompting individuals to diversify their deposits across multiple banks.

The credit risk can be mitigated by placing deposits with reputable banks, such as RBI-designated systematically important banks, or by investing in multiple banks with deposits of less than five lakh, which are guaranteed by the deposit insurance and credit guarantee corporation.

Most banks do not require a savings account to create a fixed deposit, and spreading deposits across 3-5 banks can help manage credit risk.

The immediate outlook for investors is to weigh the benefits of bank deposits against the associated costs and consider diversifying their investments to manage risk, with the option to explore other investment avenues such as government bonds, although these may come with their own set of risks and limitations.