Conservative investors normally invest in fixed deposits to ensure the principal amount invested is risk free. Instead of increasing your investment, fixed deposits are eating-up your hard earned money. Surprised!!! let’s look the reasons behind the statement.
Before investing look at post tax returns you are going to get .when you consider investment in FD for 1 year with an interest rate of 7.5%. TDS will be debited from bank when the interest amount exceeds 10000 Rs also Interest income earned is taxable as per you tax slab. Individuals in higher tax brackets would end up paying high tax which would impact your net return.
# Real Rate of return
Average inflation rate in India is around 6% between 2013-2016, FD investments are giving return of 7.5% post tax it will be around 5.25-6% which is not even beating your inflation. If you wanted to realize for your long term Financial Goals you need to at least beat inflation returns and should consider taking risk in your portfolio. Only a Financial Planner can help you do this consistently.
# Reinvestment Risk
When you consider investing in a fixed deposit for longer time horizon you are prone to reinvestment risk. Whenever you renew your deposit you should check with the interest rate prevailing, there may be chances of lower interest rate. The interest rates are subject to volatility where RBI keeps changing interest rate. Planning for auto renewal without any goal and time horizon for the investment wouldn’t make any sense.
#1lakh is insured
Even though we think that a FD is risk free investment, there is no asset which is risk free. What if bank defaults (many co-operative banks have done this many times)? As per RBI if bank defaults you are insured maximum of 1 lakh which includes principal and interest amounts held by you.
Alternate to Fixed deposits
If you are looking for alternative investments for FDs (short term) you can invest in Ultra short term or Liquid Mutual Funds or specialized very low risk hybrid products, which are giving you return of 7.5-12%.
Most people are in a hurry to take some action, before really thinking and planning about their financial life. This is like building your house without making its plan first. The most effective way to reach your financial goals and create long term wealth is to consult your financial planner.
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