Fixed deposits (FDs) are widely considered one of the safest ways to save money, offering steady returns with minimal risk. However, a recent real-life example shared by CA Abhishek Walia, founder of Zactor Tech, illustrates how misusing this financial tool can lead to unexpected losses. In a LinkedIn post, Walia recounted how one of his clients lost ₹25,000 in a single day—not due to market volatility, but because she prematurely broke her fixed deposits to fund a medical emergency.
The woman had four FDs, each with over 1.5 years left to maturity. When she broke them early to cover her father’s surgery, she incurred losses from three fronts: a penalty on the interest, a reduction in the interest rate itself, and the forfeiture of potential future compounding. According to Reserve Bank of India (RBI) guidelines, banks are allowed to charge a penalty ranging from 0.5% to 1% on the interest rate if a fixed deposit is broken before its maturity.
Walia emphasized that while FDs are a great tool for planned savings, they are not suitable for emergencies. “FDs are not your emergency fund,” he wrote. “They’re not liquid, not penalty-free, and not quick-access.” This underscores the importance of financial planning and understanding the purpose of each financial instrument. He recommended that individuals build emergency funds using liquid mutual funds or sweep-in FDs, which offer quicker access to funds with minimal or no penalties.
Liquid mutual funds, in particular, are designed for high liquidity and can often be accessed within 24 hours without incurring any charges. The Association of Mutual Funds in India (AMFI) also supports liquid funds as an effective solution for emergency savings due to their low risk and fast redemption options.
This case serves as a reminder that it’s not just about saving money, but also about using the right financial tools for the right needs. FDs are ideal for long-term, fixed goals, whereas emergencies demand easily accessible and flexible resources. As Walia concluded, the woman’s financial loss wasn’t due to bad luck—but due to using the wrong tool for the situation.
