very safe but the Your money is poor returns do not justify the investment

 

In India, most investors compromise on returns and therefore, we see huge inflows into fixed deposits year-on-year. To me, fixed deposits are dud products and have many disadvantages which you must be aware of before parking your funds.

INCOME IS FULLY TAXABLE

While investing, look at post-tax returns and not the gross returns being 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 should be enough to keep you away from fixed deposits. Through proper tax planning, you can save a huge amount of income tax which can be utilised for your future goals.

RETURNS CAN'T BEAT INFLATION

It has been proven that in the long run, fixed deposits post-tax cannot beat inflation. If your investments do not beat inflation, then your long-term goals like children's education or your retirement are likely to be affected.The cost of education and healthcare gallops ahead of inflation rates. If you want to beat inflation by a margin, you have to take calculated risks.

LIQUIDITY HAS ITS COSTS

Though fixed deposits are liquid and can be broken whenever you need money, liquidity in fixed deposits comes at a cost. If you break fixed deposits prematurely , then you will not get the same rate of interest mentioned in the deposit certificate. You will end up getting a lower rate.

REINVESTMENT RISK

People renew their fixed deposit with interest again and again for longer and longer durations without analysing when they will need the corpus. You must know and finalise future financial goals and invest accordingly . In a falling interest scenario, if you make a fixed deposit for three years or more, it is likely that you will get a lower rate of interest when it matures.

ONLY `1 LAKH IS INSURED

You should be aware that only `1 lakh of your savings is insured. As an investor you should also know the worst case scenario in case something untoward happens.

While it is important to have debt in your overall investment portfolio, it should be limited to only a certain percent age of your total assets. This would depend on your age, time horizon of your goal and your risk profile. Nobody can deny the importance of safety , but you should also look for and evaluate other op tions which are equally safe but can help you generate bet ter returns or can provide you better tax advantage.

So is there any al ternative to bank fixed deposits without tak ing any extra risk? The answer is yes. Public Provident Fund (PPF), the Sukanya Samridhhi Scheme and taxfree bonds are good options for the long-term. For the 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 returns compared to fixed deposits. Arbitrage funds are another good option for period of one year plus.

The main reason why these funds are not popular is that they are market related and returns are not guaranteed like fixed deposits and postal schemes.