Fixed Deposits: The horror
Why your money is not safe here
As an option, Fixed Deposits seem the safest place to put your money in. Your corpus stays in-tack while they give you an annual return of 5–6%. You know the exact amount you are going to receive and at any point you can withdraw the money. Zero surprises.
In this section, we are going to take a deep dive with actual numbers of all the myths associated with fixed deposits. We will also find your money a better home.
I googled “average fixed deposit rates in India” and this is what came up 1st.
The data source is credible and I crosschecked by going through some of the banks’ websites.
I want to draw your attention to this table I pulled from the very article.
The average interest rates are 3–5.7% (3% is for relatively short tenures i.e. in days/months while 5.7% is when you go for an average of 3+years) for FDs in India.
We love FDs because:
- It’s giving me guaranteed returns
- My principle is intact
- I am getting more than what my Savings account yields
- The interest rates are not going to change during my investment period
- I can open an FD with 2–3 clicks on the internet banking portal or mobile application. Worst case, walk into any bank near me and I am done in 30–45mins.
- I don’t need to spend time learning how the market works
- I don’t have to check the market time to time
- I get better sleep
So far so good. Let me add a couple more points to it.
9. I will be taxed on the amount I invest
10. I will be taxed on the interest I earn from the deposit
11. I have not factored in inflation
Let’s understand this giant called INFLATION
Wikipedia says:
In economics, inflation (or less frequently, price inflation) is a general rise in the price level in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money — a loss of real value in the medium of exchange and unit of account within the economy.
Simplified:
Year 1990: A 100 bucks can get you 100 bagels.
Year 2010: A 100 bucks can get you 25 bagels.
Year 2020: A 100 bucks can get you 5 bagels.
(Disclaimer: Value not to scale :P)
Inflation is a measure of the reduction in the purchasing power of your 100 bucks over time. As we saw earlier, with time the same amount of money will buy us lesser number/units of the same bagels.
How is inflation into consideration here?
I think most of you have already guessed it but let me spell it out anyway.
Your money sitting in a fixed deposit is also subject to inflation because it is going to be there for some considerable years (starting from 3–5 and going up to 35–40 years).
Hence, it is essential we factor in inflation over these 40 years. So the idea would be to keep your money in a place that gives you positive returns even after inflation is taken care of.
We will let the numbers talk from here:
A while back we saw that the average rate of interest from your FD was ~5.75%.
To simplify, let’s take it as 6%.
I have saved 50k over the last 6months and I choose to put this in an FD of 5years that is giving me 6%pa.
I don’t have the exact numbers but projections based on the economy’s health of the 1st quarter of 2021 suggest, inflation is expected to lure somewhere north of 6%.
Now considering we hardly manage to get 6% returns on our money from FD and with time the rates are going to be lower for new deposits, overall we are at a loss.
That rules out the assurance of our principle amount staying intact, let alone gaining something.
Also, we have not yet factored in the tax you will pay on your principle and on the earned interest, based on the income tax slab(5,10,20….) you fall under.
FDs are not keeping your money safe. It’s helping erode it.
Now that we have concluded that this is a less desirable option. We need to find alternatives. Options that will help us stay ahead of inflation and beat it by some percentage.
If inflation is at 6 or 6.5%, I should invest someplace that gives me > 6.5%.
Better alternatives:
- NSC (National Savings Certificate)
Where: Post Office
Returns: 6.8%
Principle is tax free: Yes
Interest is tax free: NO
Period: 5years
Lock-in: 3years - PPF (Public Provident Fund)
Where: Any Bank
Returns: 7.1%
Principle is tax free: Yes
Interest is tax free: Yes
Period: Till retirement
Lock-in: 15years
This should help you get started. Save your hard earned money from going down the drain because of one small uninformed choice you make today.
We often forget to factor in inflation and that is where most people go wrong. Especially when we are looking at long term wealth creation.
A million will sound dreamy today. By the time you accumulate a million, it would have lost its value.
I hope you have enjoyed reading this. Do share it with your friends and family and help them make better choices with money.
My good wishes & happy investing!
Where can you find me:
- Twitter: https://twitter.com/Pronomita_Dey
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- Write to me: dey.pronomita@gmail.com
