Fixed Deposit: The Bright and Dark Side
When it comes to investment India, Fixed deposit stands out as the dearest of all. Be it a common man planning his retirement, or a youngster is his/her mid-twenties- planning to invest in bits and pieces for future needs, the first alternative that they will go for is the Fixed Deposit. To be honest, the fact that fixed deposit is available for investors from all class makes it the William Shakespeare of Investment business. You can open a fixed deposit account even with a mere sum of Rs 1000. The other lucrative benefits of FD like
- Tenor flexibility
- Low penalty for premature closure
- Highest investment safety
- Assured returns
- Safe from market fluctuations
- Tax benefits
- One-time lump sum deposit
make it a favorite investment alternative for a majority of Indians. If someone is just planning to get some returns from his investment without any risk of losing money, they can refer to fixed deposit without any second thoughts.
Having said all that, fixed deposit, like any other financial investment has its own pros and cons. If you’re planning to invest in fixed deposit, it’s is of utmost importance for you to know all the pros and cons in order to make a sensible, conscious choice. The idea is to not have any regrets about your own decision, or else the guilt will lead to conflicts about the investment, resulting in premature closure.
Low-interest rate: It goes without saying that people who invest in Fixed deposit have a very low-risk appetite. Other investment alternatives like Mutual funds, Equity linked investment schemes offer returns up to 20-30% depending on the market rate, with a relatively higher risk associated. So, if you’re investing in fixed deposit, you are the one who’s afraid to take the risk.
Fail to cover inflation: Not many know that fixed deposits can’t cover up the effects of inflation on your investment. For example- if your bank is offering you an interest rate of 6.5% p.a and the inflation rate is 8, the chances are that your initial investment will reduce by 1.5% p.a. In short, in the given scenario, the interest rate on your investment will be -1.5% p.a annually.
Bottom line: The claim that fixed deposit is a safe form of investment is a myth. The risk is equally high especially if inflation rate turns out more than the offered interest rate.