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29 March, 2024 13:39 IST
Financial Planning
   
Are you still investing in fixed deposits?
Source: IRIS (30-JUL-15)

Traditionally investors park their savings either in bank fixed deposits or postal schemes. This clearly indicates our bias towards safety and security of the principal amount over returns and liquidity when it comes to investment. Every investment can be evaluated based on safety, liquidity and return. If the product is safe it may not be liquid or will give lower return. On the other hand if you want higher return then the principal might be at risk. Investors need to know what they are compromising for what. In India most of the investor’s compromise returns i.e. net in hand over safety and therefore we see huge inflow in fixed deposits year on year. To me fixed deposits are dud products and have many disadvantages which you must know before parking your fund.

Taxable:

In investment you should look at post tax returns and not gross return which is offered to you. The investment in fixed deposits and postal schemes are subject to normal rate of tax as per your individual tax slab, which reduces your overall return. This single disadvantage is enough to stay away from fixed deposits. Individuals in tax slab of 20% and 30% shoul
d seriously reconsider their fixed deposit investment as at the end of the day you are making government your partner in profit. By doing proper tax planning you can save a huge amount of income tax which can be utilised for your future goals.

Can't beat inflat
ion:

Normally interest rates remain around inflation rate but it is proven fact that in the long run fixed deposits post tax can't beat inflation. You need to know that if your investment does not beat inflation then your long term goals like children’s education or your own retirement is likely to be affected by your decision. The cost of the education and health care is well above normal inflation rate and needs to be planned while investing in safe avenues. If you want to beat inflation by margin you have to take extra calculated risk.

Liquidity Costs:

There is no doubt that fixed deposits are liquid and you can break your fixed deposit whenever you need your money back. But, the real fact is liquidity in fixed deposit comes at a cost. If you break fixed deposit in between then you will not get the same rate of interest which was given in deposit certificate but you will end up getting lower rate of interest which was available for reduced period of time when you deposited the money.

Reinvestment risk:

I have seen people renewing their fixed deposit with interest again and again for longer period of time without analysing when they will actually need the corpus. There for it is very important to know and finalise the future financial goals and invest accordingly. It is rightly said “Fail to plan is a plan to fail”. Now in falling interest scenario if you make a fixed deposit for 3 years or more then
 it is likely that you will get lower rate of interest when it matures. Most of the investors do not understand this risk which costs them a lot when real need of money arises.

Rs 1 lakh savings is insured:

You should also know that only Rs. 1 lakh of savings is insured. This limit is not revised since long which is overdue. As investor you should also know worst scenario in case something major happens. I am not telling that they are unsafe but the rising NPA in the some of the banks account is a major concern. NPA is just like bad debts in our business which are unlikely to be recovered. It is true that nationalized banks are Government Owned and large Private Banks are too big to fail, but in fixed deposit shifting it to other banks for half or 1% more can prove to be fatal.

Naturally it is important to have debt in your overall investment portfolio but it should be limited to certain percentage of your total assets depending on your age, time horizon of your goal and your risk profile. Nobody can certainly deny the importance of safety but you should also look for and evaluate other options which are equally safe but can help you generate better returns or can give better tax advantage.  So is there any alternative to bank fixed deposits without taking any extra risk?
Answer to this is Yes. P.P.F., Sukanya Samridhi Scheme and Tax free bonds are good options for long term and for short term you can invest in ultra short term funds or short term debt funds or FMP schemes of mutual funds with a time horizon of 3 years plus to generate higher return compared to fixed deposits. Arbitrage funds are another good options for period of 1 year plus. The major reason why these funds are not popular is that they are market related and returns are not guaranteed like fixed deposits and postal schemes.

We have allowed the banks to earn from our savings and also the government to become our partner in profit for years but with the changing time you should also change your investment pattern. The things are not similar like your father or grandfather had as we have moved out from joint family system. The high coast of foods and vegetables, rising education fees and medical bills can spoil your financial future if you don’t plan your investment. It is time to rethink and act as early as possible. It is always advisable to prepare a financial pla
n for the family before starting any investment which can solve your many problems.

(Pankaaj Maalde is a certified financial planner)


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