Fixed Deposits — Yay or Nay
For a lot of us Indian working class folks investing money almost always means opening fixed deposits. It is the easiest and the most convenient choice.
However not a lot of us understand that money invested in FDs is money lost. Let’s understand it through some very basic math.
For the sake of this calculations let’s assume you are in the 20% tax bracket.
You invest Rs 1,00,000 in a 1 year Fixed Deposit that gives a 6% interest. Maturity value of your FD is ~Rs 1,06,000. However, this Rs 6000 that you earned as interest is considered capital gain and you have to pay 20% taxes on it. This amounts to Rs 1,200.
Therefore, your effective return from this FD is 4.8% which is Rs 4,800 only.
Now let’s quickly understand what is the value of Rs 1,00,000 after 1 year based on inflation. Inflation rate in India as of March 2020 is 5.84%.
Rs 1,00,000 inflation adjusted in 1 year is Rs 1,05,840.
Rs 1,00,000 put in a 1 year FD after taxation is Rs 1,04,800.
Effectively you are losing Rs 1,040 when you put money in a Fixed Deposit.
So the verdict is Nay!! Look for better investment instruments.
Disclaimer: I am in no way saying that you should not put any money in Fixed Deposits, it could be a good choice to park your emergency fund. More about that in a later post!
Stay tuned for more such anecdotes and tidbits on personal finance.
