Why you should not invest in Fixed Deposit

General
1

Once we start earning and make some lump sum money, one of the most common recommendations from our parents would be to invest that into Fixed Deposit. Even most of our parents used to keep their savings in FDs. But does it really makes sense now, if one invest in FD for long term investment? Let’s check it out.

If you Invest 1 lac in FD for ten years with current interest rate of 5.4%, your 1 lac grows to 1.7 lacs in ten years. But if you fall under 30% tax slab, then the returns you get from Fixed Deposit is not tax-free, we need to pay tax for that as well. After tax, your FD interest rate will be just 3.92%, so after ten years your post tax returns would be only Rs. 1.47 lacs only.

But consider the inflation, remember what was the petrol/diesel price before 10 to 15 years? Currently, we pay around Rs.100 per litre, but in the year 2003 it was just Rs. 33. The fuel price alone increased more than 203% in last 15 years.

Even the difference between petrol and diesel is also very narrow now. Earlier the difference was around 30% to 35%, but in last 10 years it kept on going down. Now the difference is less than 10%.

Here’s the last 30+ years of historical inflation rate in India, there are years when inflation was more than 10% as well. But let’s consider our average inflation rate at just 6%.

Let’s do the math.

Fixed Deposit interest rate : 5.4%

After tax: 3.92%

Inflation: 6%

So the real rate of returns we eventually get is -2%. So every one of you who invested in fixed deposit for long term will get negative returns.

Do you know how much amount lying in Fixed Deposits in India? Its more than 140 lac crores. That’s right. Around, 3 lac crores of wealth getting destroyed every year just like that.

It’s better to allocate your money to fixed deposit for short term only, if you need your surplus cash in a year or so, then keeping it in FD ensures some liquidity, and you can redeem it whenever you need urgent cash. But if your expectation is to invest for long term, then investing in FD is a very bad idea. You should ideally invest in index funds that can help you not only beat the inflation, it can also generate decent returns over the long run, even though market risk is there compared to FD, but over the long run, equity always outperforms any other asset class.

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4 Likes
2

Excellent Insights.

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Most of the people do FDs to get regular monthly income as opposed to investment purpose. So if someone is dependent on FDs for expenses, it doesn’t matter what your above mentioned data says. Every financial product has its place in the economy. A single thing doesn’t work for everyone.

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An in-depth write up and applaud for the efforts put in, but then am confused by the conclusion i.e to follow the user on you tube etc - felt for a second I was in moneycontrol forum.

I wonder, why no one did a similar write up in March/April 2020. Why you need FD is exactly because of what happened in 2020 when people lost jobs due to lockdown, stock market tanked from 12,000 to 7,500 and many did not know when the next salary and how much will come . FT fiasco (so called liquid funds were shut) and DHFL nailed the coffin, Experts then started talking about Asset Allocation and FD was a part of it.

Yes Bank situation was similar to DHFL but other banks stepped in and protected the depositors money. This is why you need FD. There is no good or bad when the market tanks, HDFC, TCS, Infosys, SBI all were being sold at throw away price in April / May 2020. Those days, each day fall was hard earned capital being wiped off and the confusion was should I sell and retain what was left or hold on . Experts were then talking about “Catching the falling knife” if you had thoughts of buying i.e if you had cash.

I personally believe in the following hierarchy → Medical Insurance, Term Insurance, Emergency Fund by way of FDs, PPF, FDs etc and then any surplus in the market, but then each one to their own.

Disc: These are my personal views

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5

With the consistently declining rate of interest, I do not prefer to invest in Fixed Deposits any more.

6

Meanwhile…

7

Its good bet to create long term 10 years FD as interest rate cycle at its peak. I did that 10 years back around 9% got consistent return risk free over past decade.

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Who is offering 10Y FD with the highest interest rate?

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Currently - DCB bank offers interest rate of 7.60% for 10 years. Senior Citizen - 8.10%

Small Finance Banks are offering higher rates of 8% but the tenor is less than 3 years. (Suryoday small finance bank - 8% for 2 years and 8.51 for senior Citizen for 2 years)

AU Small finance is giving 7.75 for 45 months. For 10 years 7.20 and for Senior Citizen 7.70

HDFC/Axix is giving - 7% for 10 years and for Senior Citizen - 7.75%

IDFC - 7% for 10 years and 7.50% for Senior Citizen

RBL is the first bank to my knowledge who is offering 20 years FD in India at 6.25% and 6.75% for Senior Citizen. This tenor will give serious competition to annuity providers from Insurance companies. NRI’s would love this, as it locks for the next 20 years and no tax is charged at least as per the current income tax rules.

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If amount is greater than 5 lakh , i would prefer big banks even if interest is slight low for long term .

Small banks are risky as they might go backrupt ( though i know chances are quite slim ) but risk is too high for big amount.

Main point is : This year or early next year is good time to create long term FDs

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gilt mutual funds have yield more than 7 percent these days even after expense. And post tax is so much better than FD with indexation and 20%. Just take some target maturity fund ( gilt index funds have lower expenses too) and hold till maturity. ofc, by locking rates we take risk too because future inflation/rate is unknown.

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honestly sounds ridiculous ! that’s not how investments work! Alright if you have a house which you paid off fully and that’s the only house , your parents are nearby, your workstation is nearby, your kids school are nearby and if you lost job during covid with no money, are you seriously going to sell your house and think of living in rented house with the money???

y’all are too spoilt with FD, MF, offering immediate liquidity!

what’s really needed was 6 months to 1 year emergency fund which almost nobody has (here they say parents are the backup) along with insurances. Even for home loan there are insurances if you lost job!

FYI, you do take losses in FD , its basically negative interest rate. You dont see them. This has happened to me in pandemic. So I needed to upgrade my PC and wanted a new cpu ryzen 5 3800x. 2019 the cost was 15k , 2020 the covid came. My FD was safe, I had around 60k and upgrade was estimated around 35k back in 2019. Guess what happened, just after a year the cost of cpu was 22k and the total upgrade came to be 62k .

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Thank you for your feedback.

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But meanwhile, I bought Nvidia 3070 FE from RPTech for 44.5K in Feb 2021 and sold it on OLX for 90K. There are always some gains to be made.

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What did you do after selling though ? Wait till prices came down ?

I had old and soon to be dead 1050 at the time. Impossible prices back then, thankfully it worked long enough till prices normalized a bit. Died just in time before amazon gpu sale, first time i got an ‘expensive’ gpu. ~60k for 3080 almost 10k cheaper, prices are still a bit stupid right now with new gen.

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I was running 3 x 1070s. I kept onto them. I got hold of a 3080 later through a friend working in nvidia in the US. Still under retail compared to insane prices in India.

I sold all my used 18 x 1060 6GB for 12K & 6 x 1060 3GB for 10K in OLX (from 2020 - 2021).

Screenshot 2023-02-24 at 11.23.50 AM
Screenshot 2023-02-24 at 11.23.50 AM1432×1766 155 KB

Just a throwback picture of the good old days of GPU Bull market :rocket: :rocket:

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haha, Guess you were mining. Got out in time.

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Well, I had been waiting for ETH to PoS for a long time. Made back on everything. :rofl:

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Are you a miner or just simply sell gpu’s ?

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Used to until ETH went PoS.