Fixed Deposit - The silent killer
Yup. You read it right. A Fixed Deposit with a bank is a silent killer of your money, and NOT an investment.
We all know what a Fixed Deposit (FD) is. You give a certain amount of money to the bank for a fixed period and the bank gives you some “interest” on that money. It has been used as a mode of investment since years now!
But why do I call it a silent killer? Let's do the math:
A fixed deposit at a good bank gives you an interest in the range of 5% to 7% per year. Now that's certainly good if you compare it to what you get in your savings account. But here's the catch:
We all know what inflation is. For all those who don't, let me explain it quickly.
Anything that costs, say, Rs. 1,000 today will not cost Rs. 1,000 in 5 years from now. It will cost more. If one kg of wheat, for example, cost Rs. 50 ten years ago, today it may cost Rs. 70, 80 or 100. Typically, the price for goods in our country rises with time - this is something we have all observed.
And this phenomenon is called inflation. The definition of inflation as per Wikipedia is “a general rise in the price level in an economy over a period of time”. So, if the inflation rate in India is 10%, this means that the general prices of goods will increase by 10% every year.
Now, let's come back to Fixed Deposits.
Inflation in India last year was 7% in certain periods. And you're getting approximately 6.5% interest on a Fixed Deposit. So if you invest Rs. 100 today in an FD, you get Rs. 106.5 after a year. But any product that costs Rs. 100 today, may cost Rs. 107 next year after you get your interest (thanks to inflation).
So basically, if you kept your money in the bank, it is not even growing enough to enable you to buy the same product after a year. You are essentially LOSING money.
Like I said, a fixed deposit is a good option compared to keeping it in your savings account, when you want to SAVE money, not invest money (read the difference between saving and investing here). It’s also a good option when you want to take zero risk with your money, or you want to keep that money for an emergency that may occur. But as an investment option, it’s not a very smart thing to do.
And yet, a lot of Indians put all their hard-earned money in Fixed Deposits with a 6-7% interest, where there are other modes which give up to 15% returns.
So where should we invest? That depends on a lot of things - the major one being your risk appetite. If you are young, your appetite to take risks is higher. So most of your money should go into equity investments like stock market and equity mutual funds. There is a rule of thumb, which says:
Percentage of your investment in equity = 100 - Your age
So, for example, if you are 30 years old, 70% of your total investment should be in equity (shares/equity funds). The rest can be in other places like Fixed Deposits, Bonds, Debt Funds etc.
Confused about what Bonds, Equity Funds and Debt Funds are? Don’t worry, we’ll take you through all of it in the upcoming posts - that’s the whole point of this newsletter. For now, today’s post is about why a Fixed Deposit is not the best way to “invest” money. I’ll cover the other recommended modes in the upcoming posts.
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