Do "Fixed deposits" give returns?

[susanitaq8]

Heard Investing in FDs is the safest investment, though it gives an interest rate of up to 5.15 -6.45% p.a. But the average inflation rate is 7.5% per year, which is greater than FDs. Is it still a good choice to invest in it, or what are the other schemes that we can use to protect ourselves from inflation and earn better returns?

 

[wstorm]

@susanitaq8 long-term inflation in india is closer to 6% (not 7.5%)

FDs

minus impact of taxes

minus impact of inflation

-------------------------------------------------

equals Real returns

-------------------------------------------------

FDs are safe but cannot beat inflation.

You need to achieve a balance between safety & returns.

In the short term, safety is crucial, so pick FDs. (don't try to beat inflation)

In the long term, return is important, so pick equities ideally via MFs. (need to beat inflation here)

Always keep in mind the SLR philosophy.

S = Safety

L = Liquidity

R = Returns

Any good instrument will only give you 2 of the above. You have to give up on the 3rd attribute.

If you want S & L, you won't get R (savings account)

If you want L & R, you won't get S (capital market instruments like equity MFs)

If you want S & R, you won't get L (PPF)

There are some bad instruments which will really offer 1 of the above.

Traditional insurance products offer S but won't give you L & R.

 

[justme7777]

@wstorm Well explained. That reminds me of CAP theorem.

C- consistency

A- availability

P- partitioning

I am going to make it a point to push in this SLR, whenever I have to explain CAP to an intern or junior engineer. Maybe, the kid will be able to design both better software systems, and better budget-investment plans in time.

 

[beth008]

@justme7777 Great, you seems to be a great engineer to work with, referral milega kya!

 

[orangetabbycat]

@wstorm Good example!

 

[justme7777]

@susanitaq8 FDs are only good for capital preservation, or rather minimum depletion of capital.

Only thing that they are good for, are to keep your emergency money there. This is the money that you might need in a very unplanned manner, and it may happen during a market crash or during a recession, when you lose your job. Having to sell your stocks at 30-40% losses to run your house, may wipe off any returns that you have made for a while.

Another value is to keep your money safe after retirement. When an effective 1-2% depletion (inflation minus post-tax returns) doesn't matter as much as keeping the money safe, and its availability for emergencies matters. But even then, it's better to divide the money across equity, debt & FDs.

They are also good when you have just started out earning, or are in lower earning bracket, and till the point when investments & emergency savings aren't very different. This is one aspect that a lot of well-intended folks forget, because they don't have the same problems.

But once you are beyond the stage, and once your emergency fund has reached 6 months of expenses, you should pretty much forget about FDs.

If you are in highest tax bracket, FD's post tax returns are just pathetic. One may even say that charging 30% tax on any investment's returns, is almost a criminal act by any government. But it is what it is.

I have been in both states. There was a time when just saving money was a struggle. I used RDs to save some money every day, to create a cushion for me, in case anything desperate comes up. And for such purposes, RDs & FDs are better than MF/stock SIPs. But even then I will suggest that if can afford to put some money in equity, do it. Especially if your parents can cushion you for few years. In my case, by god's grace, there were no emergencies.

Once I reached 1-2 lacs in savings, I stopped putting any money in FDs "for investment purposes". These days, only thing I use FDs, is to park some money till there's a buying opportunity in the market. I have my SIPs running, for investments. And I push in some lump-sum money, whenever markets crash.

I increase the existing emergency funds in my FDs, only when there's a sensible reason that indicates increase in monthly expenses. (expenses, not income)

 

[jobson90]

@susanitaq8 Flexi deposit with auto swapin for emergency find is only sane use case for FD! Most of the other debt instruments with similar liquidity are also as accessible as FD now a days

 

[resjudicata]

@susanitaq8 Correct, they are not a good investment.

Also, you forgot income taxes on the returns, if you're in the bracket. FDs are tax inefficient. Hence the real rate of return is not great.

 

[johnpereless]

@susanitaq8 The correct answer is: "it depends", on your tax bracket, how far away your goal is.

 

[susanitaq8]

@johnpereless Assume it as for long term

 

[johnpereless]

@susanitaq8 Then it's all about taxation and how much risk you're willing to take. Compare the post tax returns with liquid funds and pick one. If you are willing to take more risk, explore other debt categories.

 

[alee]

@susanitaq8 In my mind the purpose of an FD is to preserve wealth. Unfortunately like you pointed out, it doesn't even do that in today's environment.

Keep in mind that you pay taxes on interest income. Depending on your tax bracket, you may have to knock off another 30%. So to keep up with inflation, roughly speaking you need a return rate of 10%.

When looked at in that way, none of the following will keep up with inflation either. But they do offer a better rate than FDs:

1. RBI floating rate bonds (currently 7.15%, but you are locked in for the period)
2. G-Secs (Government of India bonds)
3. SGB (Sovereign gold bonds - though keep in mind this is an investment in gold... not guaranteed to beat inflation, but traditionally thought to do so)
4. PSU tax free bonds (But factor in taxes from other countries, if applicable to you)
5. Savings/FD with Small Finance Banks (But there is a higher perceived risk here)

So these can be considered as alternatives to FDs. I would not consider them investments necessarily though, but rather a way to park wealth while losing less to inflation. Generally speaking, I think real estate is considered the best investment during periods of inflation.

But please note, I am no expert on any of this. I am still in the learning process. You can, however, take what I say as a starting point to do your own research.

 

[susanitaq8]

@alee Thanks for much information !

 

[evangelina]

@susanitaq8 INDMoney is providing 7.25%FD rate though which is basically SBM bank fd.

 

[sofia8484]

@susanitaq8 Fixed deposits are one of the safest investment instruments that offer fixed returns. The returns on fixed deposits are the fixed interest that you get for investing your money in a fixed deposit account.

The interest rate on fixed deposits varies depending on the bank or NBFC, the tenure, and whether you are a senior citizen or not. For example, Bajaj Finance Ltd. offers an interest rate of up to 7.95% for regular FDs and 8.2% for senior citizens FDs. HDFC Bank offers an interest rate of up to 7.0% for regular FDs and 7.75% for senior citizens FDs.

However, as you mentioned, the average inflation rate in India is around 7.5% per year, which means that the purchasing power of your money decreases over time. Therefore, if you invest in a fixed deposit that offers a lower interest rate than the inflation rate, you will end up losing money in real terms.

For example, if you invest ₹100,000 in a fixed deposit that offers 6% interest for one year, you will get ₹106,000 at maturity. But if the inflation rate is 7.5%, your ₹106,000 will be worth only ₹98,605 in real terms.

You may want to consider other investment options that offer higher returns and are linked to market performance, such as mutual funds, stocks, bonds, gold, etc. However, these options also come with higher risk and volatility, so you need to do your research and understand your risk appetite before investing in them.

 

[ashleynicoleyoung2016]

@susanitaq8 Yeah it gives returns but it matches inflation rate. That's why I don't think there is any profit in FD.

 

[zmeltn]

@susanitaq8 "Fixed deposits" are good when you are NOT looking for returns. They are used when you want to keep some funds almost risk-free. They should not be used for long-term wealth creation goals.

 

[hercrazierhalf]

@susanitaq8 Also, FDs arent the safest for large amounts. They are only insured upto 5 lacs. RBI bonds and t bills come with soverign guarantee and are now providing higher interest rates than FDs by most large banks.

“Each depositor in a bank is insured upto a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.”

 

[theonekingjesus]

@susanitaq8 Ask ankoor warikoo

 

[susanitaq8]

@theonekingjesus Please don't mention youtubers here!