Home Investment GuideStrategy Its Time To Break Out Of The Fixed Deposit Trap

Its Time To Break Out Of The Fixed Deposit Trap

by GoldenPi
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At one point in time, every family household had a fixed deposit account. The elder family members would encourage the others to put away some money in FDs as soon as they start earning. A sign that the individual is capable of managing his finances and can save for long-term goals. In those days, fixed deposits provided a good rate of annual interest. Between 2010 and 2012, the average rate of interest from FDs was around 8.5 – 9%.

But since then we’ve seen a steady fall, and the current FD interest rates have plateaued to 6.5% as of today. Once a lucrative investment option for risk-averse individuals, the returns don’t match up to what it used to be. Moreover, there are many misconceptions about the benefits of FDs, that don’t hold true. It’s time to look out for a better investment alternative.

We’ve listed down some of the problems of investing in Fixed Deposits for you:

1. The income earned from FDs is completely taxable

You will be taxed at the normal tax rate on the income earned from your fixed deposit. So when you’re looking at the returns from your fixed deposit, consider the post-tax returns to get a real sense of the money you’ve earned. With many corporate employees falling in the 20 – 30% tax slab, you will realize that most of the profits you earned from the meager 6.5% FD interest rate are being lost to tax.

2. Inflation rates beat Interest rates in the long run

Inflation rates in India are at an average of 4.5%, and the current rate of interest on fixed deposits is 6.5%. The earnings from fixed deposits after deducting tax cannot beat inflation in the long run. Further, major expenses of the future like health, education, real-estate investments, will only be higher than present-day rates. Investors will need to carefully assess these factors and invest in appropriate channels will be able to beat inflation.

3. FD pre-closures and renewals are both detrimental

Most banks have pre-closure charges for breaking a fixed deposit before it matures. Many banks also don’t offer the same interest rate if the deposit is not held for the full term. This means that your investment has actually lost money. The same holds true for renewals as well. It’s customary for individuals to renew fixed deposits without analyzing the profits made during the initial tenure. Moreover, with the reducing FD rates, it’s likely that you’re reinvesting your money for lower returns than before.

4. Contrary to popular belief, FDs are not safe

Under the Deposit Insurance and Credit Guarantee Scheme of India, only fixed deposits up to 1 lakh are insured. And this rule hasn’t changed for many years. Do in case of any unforeseen circumstance, you will only receive this amount back, and not your complete invested amount with interest. So, while banks have made it easy to open online fixed deposits and have multiple fixed deposit accounts, little has been down to safeguard your investment.

It’s time to bid goodbye to low returns of just 6% from fixed deposits!

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