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Fixed deposits have always been considered a safe investment in India, but with changing times its limitations are also coming to the fore. Due to inflation and taxes, the real return of FD is often less than expected. In such a situation, investors now want to know whether FD is still their most reliable option.
New Delhi. Fixed deposits have long been a favorite investment among households in India. Its security, stable interest rates and trust in the banking system have made it the easiest option. Even today, about 15 percent of domestic savings go into FD only. However, amid the increasing options of mutual funds and equity in the market, the discussion on the real strengths and weaknesses of FD has increased.
How strong is the security of FD?
The Indian banking system is strong, but security is not completely guaranteed. According to RBI rules, only deposits up to Rs 5 lakh in any bank are insured. Any amount greater than this remains theoretically at risk. Cases like Yes Bank and GTB have shown that even big banks can get into trouble. Especially in small finance banks and corporate FDs, it is important to evaluate rating, history and risk before investing.
Returns cannot beat inflation
The interest on FD is fixed, but its real return is reduced by tax and inflation. For example, an investor in a high-income slab on an 8 per cent FD gets around 4.88 per cent net return after tax. If inflation is 6 percent, the real return becomes negative. Whereas in equity funds or stocks, tax is levied only on realisation, which makes compounding faster in the long run.
Poor option for long term due to low growth
FD is safe, but its growth potential is limited. In the long run, just looking at security prevents the investor’s wealth from growing. Over a time horizon of 7–10 years, equity based products generally provide better returns by balancing the risks. In such a situation, relying only on FD can weaken the long-term wealth creation strategy.
It is important to maintain the right balance
FD cannot be called a completely bad option. It is still useful for emergency funds, elderly investors and those seeking stable income. But keeping the entire savings in FD is not beneficial. It is wise to create a balance between safe and growth based investments, so that both security is provided and wealth also increases.
