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How will bank fixed deposits help me? − Money Essentials #9

by Money Puzzle   ·  July 5, 2022   ·  

Fixed deposits are the talk of the town with interest rates heading higher. Indians already have a bulk of their savings in bank fixed deposits. But, do you know how this investment can help and what are the shortcomings of fixed deposits?

The benefit of bank fixed deposits lies in the presumed safety of your money. If you invest in deposits of large-sized private or public sector banks, you rest assured that the money is in safe and secure hands. Moreover, the deposit insurance and credit guarantee corporation insure up to Rs 5 lakh of your deposit in any commercial bank operating in India. The money in fixed deposits earns an interest which is usually higher than what your savings bank account will pay. Bank fixed deposits come in various tenures ranging from 45 days to 10 years, giving you a wide choice of how long you wish to remain invested.

However, there are some disadvantages too. The interest you receive on fixed deposits is taxable at your income tax rate. If you want to withdraw the money before time, there could be a penalty involved. The biggest drawback is that fixed deposit investments face an inflation risk. This means that often the return you earn can be lower than the rate of long-term inflation and your real return is lower than what you see. For example, currently, a one-year fixed deposit gives you around 5.25%-5.5% interest per year, but annual inflation or price rise is around 7.5%-7.8%. This means, thanks to price rise, the value of your money is declining faster than the rate of return you earn on bank fixed deposits.

Be mindful in allocating money to bank fixed deposits. If you are looking for safety of capital in the short term, these investments can help you. In the long run, your fixed deposit returns may lose out to inflation.

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