It is a common belief that fixed deposits are the safest and best investment. Its rate of interest is high and nature-wise also it is very flexible because anyone can open a fixed deposit account for one month, one year or may be ten years or even more. Those investors who are risk averse, for them fixed deposit is the best option. But this is not true. In fact fixed deposits are the worst investment any one can ever have. Yes one can argue from the point that fixed deposit offers a secured and guaranteed return at the time of maturity. Also they are liquid in the sense one can withdraw the amount anytime if he wants to like in case of sickness, marriage etc. To be more precisely, fixed deposits are for those sections of people who are afraid of losing their money in stock markets and wants to keep their hard earned money secured for the future generations.
Despite of all the facts mentioned above, fixed deposits have large number of disadvantages which surpasses its little advantages. The main reasons are:
1. The rate of interest is always lower than the inflation rate – Whenever you are investing in FD, indirectly you are losing money, because every year we experience inflation rate from 8% to 10%. whereas most FDs offer 7-8% interest rate. This means that after maturity though the nominal value or face value of the deposited amount along with interest seems high but its real value has actually decreased. Now you can buy less goods and services with that amount than earlier. In short your purchasing power falls.
2. Fixed deposit interest rate is taxable: Another reason for the low yield of fixed deposit is due to the deduction of taxable amount. The interest amount is taxed as per the ongoing tax slab. The higher is the amount you deposit in FD the lower will be your return in future. Tax concession or benefits cannot be enjoyed in fixed deposits.
The two way deduction from your income decreases your FD return. Thus it is beneficial to invest in mutual funds or SIP if you plan for growing your wealth in future. Investing in Fixed deposit is not a good idea. Yes mutual funds do bear market risks but in the long run evidences show that mutual funds generates phenomenal returns.
Source: Economics Times
These calculations are done assuming the rate of returns to be 8%, Tax bracket being 30% and 6% is the inflation rate.
Thus it is very clear that for long term investment, equity mutual funds and debt funds are the perfect investment instruments to be used. To protect your capital assets, debt investing should be your choice and not fixed deposits.
3. Penalty cost on early withdrawal: In case of emergency if you withdraw the whole amount before maturity banks may charge you a premature penalty cost. Also the interest rate is applicable from the creation date to the withdrawal date. That’s why investors are advised to invest for shorter tenure and then reinvest after maturing. In case of mutual funds investment and SIPs no such issues are there. Also lots of complicated paper work needs to be done.
Apart from these demerits, there are also some hidden charges involved in Bank fixed deposits for example NRIs who have their accounts will have to pay TDS at 30% rate. TDS is the Tax Deducted at Source. Also the TDS is high for those investors who do not have a Pan Card.
Bank deposits for a fixed term is not at all a good investment decision as they are not liquid investments. You will be penalized if you try to withdraw your amount before end of the tenure. Also we see that the return is non-profitable due to high rate of inflation. Anyone who avoids risk will be inclined towards fixed deposits and a risk neutral investor may be indifferent between fixed deposits and mutual funds investment but a risk lover will definitely go for other investment plans than fixed deposits like Systematic Investment Plan, debt mutual funds and equity mutual funds where return is much higher.