Fixed Deposit, Yes, one very important thing about Personal Finance, i.e. Investments in Bank Fixed Deposits. Yes! In the country like India, there is widespread ignorance about the most important aspect of life, and that is finance and investments. In India still huge population believes in investing in Bank Fixed Deposits.
There was time, in India when the Interest rates were hovering from 9% to 10 %. And in fact people were getting these much of Interest rates on their Fixed Deposits by the Banks. So many of the people were enjoying to get these much of Interest on their Bank Fixed Deposits! But over the period of time the Interest rates in India are falling, and of course it is very good for economy, as it avails the credit at low cost for the business community. But even with these falling interest rates the population who is still dependent on investment of Bank FD is going to get affected.
Considering the modern age of investment opportunities, the investments in Fixed Deposits have become outdated in India because of the following reasons
1. Falling Interest Rates:
As discussed, there is sharp downtrend in the overall interest rates in India. There was time when Indian Investors were getting around 9% interest rates on their Fixed Deposits, but today they get only around 6% to 7%. And In fact there will be even more decline in the interest rates in coming future.
2. Fixed Deposits expose you to Interest Rate Risk.
Yes, this is serious drawback of Fixed Deposit Investment. Suppose someone invests, in the Fixed Deposit for the period of 1 year, then, he is clueless, how much interest rate he will get after 1 year when, he will have to re invest into that FD. In fact in falling interest rates, this risk is increasing.
3. Fixed Deposits are not Tax Friendly:
In India Income Tax aspect of Investments also needs to be considered. Interest on Bank Fixed Deposits are taxable, and as the tax is deducted at source. In fact even if Fixed Deposit is for the tenure of more than one year, the, tax is deducted on the accrued interest of that year of that Fixed Deposit. This makes the Fixed Deposit even more unattractive.
4. No Liquidity:
This is very obvious drawback of Fixed Deposit. FD is rigid investment. And it can not be availed before maturity.
5. Maintaining the Record of Fixed Deposits are cumbersome :
This is also one tricky problem of Bank Fixed Deposits. To maintain the record of the Fixed Deposits and to check and ensure that they are en cashed at maturity is little difficult. In fact many times it may happen that the Investor misses the to en cash FD in time, and of course bank can enjoy the deposit of the customer for some more time without compensating with interest.
6. No Systematic Investment Approach:
This is also one issue of Bank Fixed Deposits. It does not offer any systematic investment approach, or any goal oriented investment policy. It is only isolated investment instrument, and many times people do not know what exactly to be done when it gets matured.
Considering these factors, be sure that Fixed Deposit is the most insane and outdated investment instrument. Many wise individual investors have stopped investing even a single penny into Fixed Deposits. Like Bank Fixed Deposits, even Company Fixed Deposits have more or less same problems.
So as I always believe and say, the best available investment instrument available today is Mutual Fund, to cater the needs of every investor. In fact debt funds can be better investment opportunity for investors, who wish to switch from Fixed Deposits. Kindly check my article 10 Reasons to Invest in Mutual Fund.
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