- About Coverfox
The inflation rate in India has been high, and your fixed deposit may fail to give inflation-beating returns. However, it is possible to beat inflation by a comfortable margin and earn higher returns by investing in a fixed deposit for a short-term.
A penny saved is a penny earned. However, thanks to ever-rising inflation, over a period, the value of money saved could be much less than when it was earned. You cannot ignore the burning impact of the rising cost of investments. For example, Rs. 100 earned will be worth Rs. 92 after a year, if it’s not invested and the rate of inflation assumed is 8 per cent. That is why you should always be on the lookout for investment options whose returns are more than the prevailing inflation rate.
You might get excited when banks offer 8 per cent interest rate on a five-year fixed deposit. But you should be concerned if the 8 per cent return rate is sufficient to meet with the pace of the rising inflation. Is this what you are going to get on maturity? The answer is No. This is because you have not considered falling value of money due to inflation and taxation.
What is inflation? In simple words, it is a rise in the price of goods and services over the period. The general rule of economics is that the value of rupee will not be equal to the same in the future. While calculating returns over a period of time, it is important to keep inflation in mind and know the difference between returns on paper and real returns, i.e. the purchasing power of money.
If we talk about a fixed deposit, the interest rates offered by banks hardly beat inflation. Moreover, when tax is deducted from the interest income, returns on fixed deposit may fall below the rate of inflation. However, this can be a scenario with long-term fixed deposits. It is advisable to invest in fixed deposit for short term to take interest-rate advantage. The inflation may not affect the short-term depositor who falls in the lower tax slab. However, for investors in the higher tax slab, the fixed deposit may not serve the required purpose. In the long run, returns from a fixed deposit may be eaten by tax and inflation rates.
Perhaps, equity investment beats other classes in nominal terms despite volatility involved. However, if compared in terms of risk involved, fixed deposit shine over equity investment. If you consider the risk of market fluctuations, the equity investment would be riskier than a fixed deposit.
Fixed deposits are one of the safest investment options available in India. You know exactly how much returns you are going to earn on maturity since the interest rate is pre-determined. High inflation and tax deduction on the interest income are certain disadvantages. However, it is possible to maximize your returns on fixed deposit.
No investment can guarantee inflation-beating returns. In short, you need to choose an investment option based on your financial goals and risk appetite. If the features and benefits offered by fixed deposits match with your goals, then it is a safe choice. For those who are willing to take more risks for more returns, there are several market-linked investment options offered by top fund houses of the country. Happy investing!
Recommended Read: Five Things to Consider Before Investing in a Fixed Deposit