Think Beyond Bank FDs

Sachi has just got a good job in a IT company with handsome salary. She is very happy and celebrating party with her friends. With every salary she is using her income for shopping, eating out and having fun. Life is real fun now. 1-2 years pass by. Her boyfriend suggests to start saving for future and fixed deposit with banks are best. They are safe and liquid (can be en-cashed anytime). She starts accumulating money in bank accounts and starts investing in FDs regularly. She is very happy as she has started to invest early and her financial life is on track now.

4 years down the line, she wants to buy a good smartphone. It is costing around Rs. 38,000. She knows there is 1 FD which is maturing this month. She had invested Rs. 30,000 for last 3 years. @ 6.70 % return she received total amount Rs. 35, 799. To her surprise there was tax (Rs. 644) deducted at source. She falls in 20 % tax bracket so while filing returns more tax will be charged. She tried to calculate the return and it came to 5.73 % p.a. That’s very less compared to what was promised.

Post-tax return on FD are less compared to the returns promised

Also she came to know that FD returns are less than normal inflation. So actually money is de-growing. So is safety worth for the money de-growth?

FDs are not beating the inflation

She also checks with the bank if she breaks her FD for urgent cash what are the penalty charges. Bank tells her although for 5 years the rate in 6.70 % but if you break within a year then interest rate on date of deposit for within 1 year deposit will be provided. So for you Sachi it will be 6.40 %. Oh this return will further be depleted because of income tax if I break my FD.

Liquidity in FD comes with a heavy cost

One of the FD with the bank she had been renewing every year. Initially the rate of interest was 8 % and now it is 6.70 %. She wanted to check how much her amount might have grown by now in 5 years. She had invested Rs. 40,000. Post tax I would have got Rs. 12,982 in the form of interest. That’s 6.49 % p.a. Not so great. I am paying the cost for safety. Is it really worth? She had planned to buy a 2 wheeler with this amount. But while investing and renewing the FD there were no calculation if the maturity value would be able to sufficiently fund the purchase. In a falling interest scenario, if you make a FD for 3 years or more, it is likely that you will get a lower rate of interest when it matures.

Every financial goal needs to be mapped to respective investment

Sachi had put money for FD in multiple banks. She tried to put in banks which provide ½ or 1 % more return over what nationalized banks were promising. In one of the co-operative bank, there were more non-performing assets (NPA). NPA are like bad loans given by bank which are unlikely to be recovered. Also some bank officials were involved in passing these loans. RBI came to know about this and they freeze all the bank accounts. Now all those who had invested in FDs in that bank cannot remove any money. Sachi is angry with her boyfriend as he had said FDs are safe and best. He told – his father also invests in FDs and he had told to invest. He said even his money is blocked in that bank now. After further checking they came to know only Rs. 1 lakh is secured for bank deposits. Sachi yells at her boyfriend where is the safety?

Is FDs really safe with banks?

So is there any alternatives to bank fixed deposits without taking any extra risk?

Wealth Doctor says Yes there are!!!

For long term

• Public Provident Fund (PPF)
• Sukanya Samriddhi Scheme
• Tax free bonds & Corporate Bonds

For within 3 years

• Ultra-short term mutual funds
• Short-term debt mutual funds
• Fixed Maturity Plan (FMP) mutual funds

For 1 year plus

• Arbitrage mutual funds

Return is not guaranteed for mutual funds as they are market linked. Not stock market but linked to prevailing market interest rate changes.

Mutual funds sahi hain

Wealth Doctor says to Sachi scenario is not similar what our father or grand-father as we have moved out of the joint family system.

The high cost of foods, along with rising cost of education and health 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 advisable to prepare a financial plan for the family before starting any investment which can solve many problems.

Early regular investment in apt financial product is the key to better financial future