Why you should avoid investing all your money in a FIXED DEPOSIT?

First job – first income – first savings – first investment is always a fixed deposit. The moment there is any lump sum savings in our bank account, we make a fixed deposit.

Recurring deposits are also a type of fixed deposits where a fixed amount is invested monthly in the deposit account.

Most either invested in a fixed deposit or a recurring deposit once in our lifetime. Fixed Deposit is the stepping stone to our investment journey.

Fixed Deposit is a low risk – low return investment product.

Return: A fixed deposit currently gives a return of 7%-7.5% before tax and after taking into an account the tax rate of 30% on the income from fixed deposit. It would be anything between 5.75% – 6%.  Hence, the return from a fixed deposit is not a lot.

Risk: Investors assume that Fixed Deposit is the safest investment option and nothing can go wrong with them. It is important to note that a small amount of risk is always associated with every investment. The RBI ensures a balance of Rs. 1 lakh per account holder in case of default by any scheduled bank. Anything more than that in any bank is not insured and hence, is at risk, if the bank was to shut down. So, if you have a deposit of 5 lakh rupees with a scheduled bank and it was to go bust, RBI will only pay you back 1 lakh rupees. Also, it is important to know that the banks are governed by RBI and the big banks will not just shut down tomorrow, there is a relative risk which we all bear when we take a fixed deposit.

Co-operative Banks: Co-operative banks are not scheduled banks. They generally give a return of 1% or 2% more than the other private/public banks making a fixed deposit with these banks a  very lucrative investment option. However, a higher return means higher risk. Co-operative banks are notoriously known for shutting down without any prior notice and the government may not come to rescue these banks. So, the amount of risk that you take for 1% extra return is not justifiable and it is not a MEASURE RISK and hence, you should try and avoid the same.

Why do you invest?

  1. You can own what you cannot own today
  2. You can own more than what you want to own today but cannot.

Basically, your investments should beat inflation. Because with time, things keep getting more expensive at the rate of inflation, so your money today has to grow at a rate higher than the inflation rate for you to be able to afford what you cannot afford today.

The current rate of inflation is 5% – 5.5% and hence, your investments must fetch you more than this to help you get whatever that you want to own.

Are your fixed deposits giving you a return higher than the inflation rate?

We have tabulated below to explain how your money grows in a fixed deposit versus in a mutual fund. This growth in money is compared to the price of movie tickets and how the same has grown expensive over a period of time.

In this table, you can see the difference in the price of a movie ticket, 10 years ago and today. The same is compared to the growth in your fixed deposit investment @current rate of 6%.

Whereas, if you invest in mutual funds, your money would grow @15% and after 10 years, you will have 4 times the value and in 20 years, 10 times the value you get from a fixed deposit.

You should just not invest your money, but you should invest it right to get more than what you can today.

If you can 10 years from today exactly what you can today, what is the point of investing. This is what fixed deposit does to your money. It does not make it work hard enough for you to be able to enjoy life. By investing in a fixed deposit, you will only be able to own what you have today, tomorrow, not really a lot more.

Wealth Cafe Actionable – Invest in fixed deposit when you are closer to your goal and cannot afford to take a risk. You can also invest for your emergency fund in a fixed deposit as the returns are similar to a liquid fund but fixed deposits are safer. The only problem with fixed deposits is that they are illiquid and you have to bear a penalty for premature withdrawal of a fixed deposit.

 

Leave a comment



CONTACT US



Wealth Cafe Financial Advisors Pvt Ltd is a AMFI registered ARN holder with ARN -78274.

Wealth Cafe Financial Advisors Pvt Ltd is a SEBI registered Authorised Person (sub broker) of Motilal Oswal Financial Services Ltd with NSE Regn AP0297087003 and BSE Regn AP0104460164562.

 

Copyright 2010-20 Wealth Café ©  All Rights Reserved