Fixed deposit is undoubtedly the safest investment tool in India, but when talking about highest returns – it’s definitely not on top. It was a thing in the preceding decade when the concept of share market trading was still in the dark, but now, it has emerged on the surface – and ever since, the fixed deposit has started losing its monopoly in the investment arena.
Today, if you talk about FD being a potential investment solution, you’re either unaware of the existence of inflation rate or you lack the risk appetite. Keeping in mind the inflation rate which was somewhere around 4.87 in May 2018; the real rate of return any fixed deposit scheme can garner is not more than 3%.
So, coming back to the real question, is fixed deposit good for high returns? The answer is a clear NO. There are many reasons but the primary ones are listed below. Do give it a read.
- Lower interest rate: The return on investment in FD is the lowest as long as you are not considering savings account as an investment tool. The max you can get is 8.4% per annum which is also not much as it would seem to you because the interest rate may be higher, but the compounding frequency is once a year.
- A lower real/effective rate of return: Real ROI (Effective ROI) = ROI offered – Inflation rate. Inflation is sure to increase with time no matter by how small amount. Increasing inflation will decrease the value of money and the real rate of return, which is how much you are gaining from your investment with respects to the current cost of living.
- Interest deduction on premature withdrawal: Before we talk about the penalty charges, let’s know about premature withdrawal. Premature withdrawal is when you liquidate your investment i.e withdraw your money from the fixed deposit account before the maturity date. Doing so makes you eligible for penalty deduction on the interest rate offered initially, which reduces the promised returns. Ask me what’s bad about it? The penalty is 2% on the offered interest rate and when that happens, your effective interest rate further decreases, lowering down your actual profit.
- TDS on Fixed deposit is unjustified: As per the budget for FY 2017-18, any income in the form of interest from a savings scheme above 10k was eligible for a deduction, be it a senior citizen FD or a regular one. Everyone was eyeing at Arun Jaitley to raise the limit in the next Budget 2018 announcement to push the same a little in their favor. Mr. Jaitley, however, looked like was watching half-girlfriend while preparing the budget – he announced an increase in TDS limit from Rs 10k to Rs 50k, but only for the senior citizens.
- Fixed deposit can’t be used for long-term financial planning. When you say fixed deposit, you can’t and you shouldn’t associate the term with long-term investment. Fixed deposit is suitable for shorter tenures like for a year or so, but investing in a scheme of longer tenure is a serious pitfall. If while your investment matures, the inflation rate increases beyond your ROI, your investment will add no value to your life.