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% should
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 inflation:
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. 1lakh 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 ½ 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 3years 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 cost 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 plan for the
family before starting any investment which can solve your many problems.
This article first appeared at indianotes.com
http://www.indianotes.com/Finance-How-to/Are-you-still-investing-in-fixed-deposits/196470/2/T
