Are FDs Really Safe?








The no- brainer in the investment world of a middle class life revolves around fixed deposits or bank deposits.  India has 3568385 Crore or INR 35684 Billion in fixed deposits as per the RBI data out of which INR 5792 Billion is contributed by the house hold sector. Equity has an allocation of INR 575 billion, insurance at INR 2000 billion. No wonder why people complain about their jobs, because the allocation above speaks for itself for the misery.

What is a Fixed Deposit?

Fixed deposit in simple terms means that you lend a certain amount of money to the bank at a higher interest rate compared to a regular savings account. In todays market FD offers somewhere between 7-8 % pre tax to the investor.

Taxation Issues:

The problem with the above returns is that people do not consider what happens after taxation. If you consider a post tax return on FD annually then it comes around 5.6%.  So basically my money grows at a snails pace of 5.6% annually. Consider an annual inflation of 5.8% as per the latest figure  then your money de grows by -0.2% annually. Fantastic!

What happens in 30 Years.

Lets consider the following data. If you had started working in 1970 with an annual salary of INR 18000 and savings rate 20% put into FDS and retired by 2004. Also assuming your expenses in 1970 was INR 7200 annually and 2016 the expenses grew to INR 190000. 12 years post retirement assuming that you don’t have a pension, then you would be left with only INR 33 lacs.

  • The thing to remember here is that I am assuming you at least save 20%.
  • If the savings rate drop to 10% then situation is bankruptcy

Inflation Is Real Believe it Or Not

Consider this in 1989

  1. Dal price in 1989: Rs 10 Per Kg,
  2. Dal Price: 2016: Rs 136 Per kg

This basically means a growth of 10.5% annually. Question is whether your money has grown at the rate?


The graph shown above is not the return of Fixed deposit but inflation and inflation can really destroy wealth if investments are not thought through properly.
FD are Riskier in the long term than Other Instruments in the Short Term
The conclusion is that although in the short term you get the luxury of no fluctuation, which is of course a no brainer. In the long term when wealth gets destroyed the risk of outliving your assets grows even more which is more risky.

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