The coronavirus pandemic situation delivered an unprecedented and brutal blow to the economy of this country. With the closure of all industries for a good portion of last year, the economy suffered quite a lot. There is inflation in the market and the interest rates are also falling. For this reason investments in fixed deposits are kind of taking a back-seat from the investment portfolios of many people.
Should you continue investing in Fixed deposits?
This is a difficult question to answer and a proper analysis of a few facets of the fixed deposit investment avenue is in order.
General opinion on Fixed deposits
A couple of decades ago, the SBI fixed deposit rate was 13% for deposits of more than three years. Back then, most people fell in the lower tax bracket due to the low-income levels and thus, the interest rate was an attractive prospect for them. In general, fixed deposits are often referred to as India’s favourite investment scheme due to the minimal risk and guaranteed high returns associated with it. But things have changed.
In this economy, FDs don’t serve any such exceptional purpose for those in the high tax bracket. Yet some people like it old-school and invest in fixed deposits with banks. Over the last few years, even that is being threatened because of the banks freezing the deposits for various reasons. Deposits were stuck as a result of the moratorium on withdrawals issued by the Reserve Bank Of India. For those in the high tax bracket, keeping liquid money to a certain limit, in the form of fixed deposits is probably the only benefit. But it makes perfect sense for those in the lower tax bracket to continue with FDs.
Moreover, there is a risk involving inflation with fixed deposits. Any financial instrument should be growing your money, so before you put any money in FDs, you must verify whether it will make your investment grow. If the fixed deposit is adjusted for inflation, it might even return negative returns.
The scenario in the interest rates for fixed deposits with banks
The current repo rate is the lowest amount it has been in at least 17 years. The Central bank has cut 250 basis points since January 2019. The present repo rate is 4%. Recently the RBI governor declared in their monetary policy that they plan to support the revival of the economy by holding on to the policy rates but keeping a watch on the durable reduction of inflation. This essentially means that RBi will further cut the interest rates, which would lead to the banks decreasing their lending cost. As a result, there will be a further decrease in interest rates for fixed deposits.
Currently, the SBI fixed deposit interest rate is 5.4 % for a five-year term deposit. The post-tax for those who belong in the higher tax bracket would come to around 3.7%,
Is fixed deposits with banks a good investment choice?
If you are someone who belongs to the middle-income category but fall in the highest tax bracket and looking to build a body of funds for future expenditures such as children’s education or maybe the retirement fund, you should not go for fixed deposits right now. While CPI inflation is 6% now, the lifestyle inflation and inflation in education are even higher than 7-8%. There’s a chance that bank FDs will generate negative returns for you and you should choose avenues that generate returns above the inflation rates.
For the fixed deposits that are already existing, it is best to let them roll out as they can guarantee liquidity. You can also use existing fixed deposits to repay outstanding debts.
If fixed deposits are gradually ceasing to be an option that enriches your financial portfolio then what other investment avenues should you go for? Well, there is the Public Provident Fund and Sukanya Samriddhi Yojna both of which offer more than 7% interest rates. The investment limit in these two schemes is 1.5 lakhs and the returns are free of tax. The Senior Citizen’s Scheme is a good plan which offers a 7.4% interest rate and one can invest up to Rs. 15 lakhs in this scheme. Mutual funds are a good option for long-term investors.