The writer explains about Fixed Deposits and whether they are a popular investment choice as they once were
There are three things you are guaranteed in India: rich heritage, delicious street food and the fact that your elderly relatives/parents will tell you to invest in fixed deposits. This traditional form of investment is usually part of every other Indian investor’s portfolio because of the fixed returns and safety. Income certainty and capital protection features of bank FDs also make them immensely popular among investors with low-risk appetite and those investing to meet their short-term financial goals. However, the millennials do not prefer this form of investment due to its low interest rates in these recent years.
Sounds almost absurd, but there was a time when bank fixed deposit interest rates were as high as 13% during 1995 to 1997. It was not just a safe investment option but the best investment plan for higher returns during the period. After the peaks of the nineties, FD interest rates started a downhill journey. Historical data suggests that Indian investors are moving away from FDs. There has been a decline from 63.5% to 54.7%.
Also, in the last few years we have been seeing bank defaults. Whenever such an incident occurs only `5 lakhs per person per bank is guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This includes the principal and interest. Any amount over `5 lakh is subject to risk. According to the survey and research only 49% of the banks are paying the DCIGC protection, so be careful while choosing your bank even if you have FD’s less than `5 lakhs.
Fixed Deposit Taxation
Interest from FD are not tax-free, Interest earned from bank FDs, including tax-saving FDs are eligible for a tax deduction under section 80C, it is taxed according to the investors tax slab. Thus, for the ones falling in higher-income slabs, their post-tax returns generated from most bank FDs may not exceed the average inflation rate during the FD tenure.
Inflation: The Silent Killer
Rising inflation can impact FD returns. For example, the rate of inflation is 5.6% and you invest in an FD with 6% returns (considering the highest) and if you come under the 30% tax slab then your net returns post tax will be 4.2%. Considering the inflation and your interest from FD your post inflation returns will be – 1.4%, you are losing money every year in FD. That’s why market related investments like stocks, mutual funds and other guaranteed investment plans are becoming popular – they are known to comfortably outperform inflation.
FD for Regular Income
If an investor wants his investments to give a regular income then there are still better options than FD. There are debt funds that are better than bank FDs due to the long term tax efficiency. You can keep withdrawing from your debt fund corpus or set up automatic withdrawals instead of relying on the monthly interest payout by the banks. There are also other investment products which keeps the investors capital 100% protected, has tax benefits, a fixed interest rate just like FDs, and gives guaranteed regular income monthly/yearly.
Future Interest Rates
India is a developing country and the interest rates earlier were as good as 13% in the 1990s; however as India started developing faster, the interest rates kept falling. If you look at developed countries like Switzerland, Japan, Denmark etc their interest rates today are in negatives or zero. The near future of India will also lead to interest rates falling more and more. Now would be the best time to find the best alternative that works well for you and shift your money to a better place.
Fixed deposits do have their advantages as well. They provide easy liquidation, guaranteed yearly returns which can be a source of income, tax benefits up to `1.5 lakh under Section 80C of Income Tax Act, capital stability up to `5 lakhs, loan facility against FD; and is a hassle free investment.
Is FD the best investment option today?
The answer to that is that there is nothing called as the best investment product. Fixed Deposits have their advantages as well as disadvantages. There is no much of wealth creation under this investment as there is no risk involved. Having a sufficient amount in fixed deposits in your portfolio is a necessity to tackle any kind of financial emergencies or so but investing a huge chunk of your savings in FDs is not advisable for most of the people of any age group.
