Are you still LOSING MONEY in FDs?

There is no doubt that bank fixed deposits (FDs) are considered safe in that you will most likely get your money back. But did you know that bank FDs can negatively affect your savings over the long term?

Traditionally investors park their savings either in bank fixed deposits or postal schemes. This indicates a bias towards safety and security of the principal amount over returns and liquidity when it comes to investments. To me, fixed deposits are dud products and have many disadvantages which you must be aware of before parking your funds.

Returns can’t beat inflation:          

Normally, interest rates run parallel to the inflation rate, but it has been observed 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 own retirement are

likely to be affected. The cost of education and healthcare is ahead of normal inflation rates and need to be planned while investing in safe avenues. The average inflation rate in India for 2012-2014 was 9.76%. Most FDs only gave you about 8.5% interest before tax and around 7% after tax. This means, you effectively lost money every year you invested in an FD. If you want to beat inflation by a margin, you must invest in instruments like equity which has given long term average returns exceeding 12% CAGR.

We need to change our mindset and overcome fears:

I recently met someone on a flight. When I told him what I do for a living, he looked at me suspiciously and said, "I don't invest in equity any more, I've always lost money. But FD is giving me good returns of 8%." I spent the next few minutes convincing him to my firmly held belief that the best way for investors to beat inflationary returns is through equity investing. The gentleman was unconvinced – due to his publicly transmitted fear of equity.

When I checked some data on the internet, the following chart surprised me.

• Rs 100 Invested in equity 30 years ago would have grown to Rs. 5122.
• The same Rs 100 in any other asset class would have grown to half that amount, at most.

Only Rs. 1 lac is insured:

While a number of people are of the opinion that FD is safe and can never be defaulted  upon by any bank, one should be aware that only Rs 1 lakh of your savings is insured. This limit has not been revised since long. As an investor you should also know the worst case scenario in case something untoward happens, you get only Rs. 1 lakh out of your total FD.

The high cost of foods, along with the 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.

People normally hold financial assets in these buckets—equity, debt, and cash. Cash can be held in current and savings accounts, short-term deposits, mobile wallets, liquid funds and in brokerage accounts, in addition, of course, to physical cash. 

Holding on to cash makes sense for meeting routine expenses, imminent purchases, vacations or emergency funds. Some goals may occur in a short period of time, such as putting down a deposit for a house or car purchase. Clearly, you should not invest such funds in anything that could erode capital in that time. But apart from keeping money as cash to fund imminent expenses, the rest of your portfolio should be working hard for you.