Investment Myth 1: Fixed Deposits are Safe

A lot of people have FDs and you might be one of them. So first, let’s understand what an FD is. A fixed deposit (FD) is a financial instrument provided by banks or other financial institutions that provides investors a higher rate of interest than a regular savings account. This, in most cases, might be true but everything has a catch, doesn’t it? So let’s find out if FDs are completely dependable or not.

Here is the trend of FD returns for the last 25 years. As you can see it has been steadily declining in the due course of time. The reason is we are slowly moving from being a developing economy to a developed country. The interest rates in developed economies are very low, sometimes even negative. It simply means that as and how our economy develops, our long term interest rates are going to go down. This is one factor we need to keep in mind before investing in FD for the long term.

Return on FDs is also affected by the inflation rate of the country. Let’s take an example and say the inflation rate is currently 7.5%, in simple terms, a product costing you Rs 100 today will cost you Rs107.50, after 1 year. If your FD provides 4.5% per annum interest that means you will get Rs 104.50 on an investment of Rs 100 after 1 year. So your real rate of return will be 104.5 – 107.5 = -3.0 or in other words, you are losing 3% on your investment! And that too we haven’t considered the impact of tax on it yet.

Another thing about the FD rates is that they keep fluctuating. At the start it might seem like a good and steady return but if the rate increases you will be stuck with a low return long-term investment. Not great right?

It’s a good thing to check the financial condition of the bank or financial institution before you put your money in FD. Say you put your life savings of Rs.10 lakhs into an FD on your name. Now if the institution hypothetically becomes bankrupt or its license gets canceled, you may recover a maximum of Rs. 5 lakhs only! And that too if it is covered by the Deposit Insurance and Credit Guarantee Scheme of India. If not, you might get nothing at all! All your savings earned with hard work and struggle, Poof! gone.

In conclusion, don’t put all your money into a single FD. You can keep the amount required for your short term needs in multiple FDs in diverse banks. For better returns over the long term and depending on your risk appetite, you can invest in short-term debt mutual funds. Alternatively, you can consult your financial advisor.