Fixed deposits are an excellent option if you want to invest your money in a safe investment vehicle. Since market fluctuations do not impact the rate of return for fixed deposits, it can be a safe investment option for risk-averse investors or individuals looking to invest a portion of their savings in a safe zone. Investors can even use fixed deposit calculators to compute the expected returns on an FD. These calculators allow you to determine the annualised interest rate on your fixed deposit, decide on your invested amount, design schedules for future fixed deposit investments and gauge your investment growth.
Investing in fixed deposits is a good option, but it will not make you rich. Here is a study on the two primary reasons that may lower your expected returns
Inflation plays a crucial role in determining the value of an investment. Suppose you have Rs. 100 accumulated as savings. An inflation rate of 10% may lead to a value of Rs. 100 to drop to Rs. 90 next year. If the inflation rate is higher than the return you would be receiving on your fixed deposit investment, you will end up making a loss on the invested amount rather than gaining wealth.
Let us understand the term “real rate of return” to know more about the impact on inflation.
Suppose the fixed deposit interest rate is 9%, but inflation is 9.05%. You would incur a net loss of 0.05% on your invested amount. In this case, your rate of return is not at par with the inflation rate, and your real rate of return becomes negative. Moreover, you would even have to pay tax on your returns, which would further bring down the value of your investment.
The interest returns you receive on fixed deposit investments are taxable and charged under tax deducted at source, commonly known as TDS. Therefore, a portion of your returns gets eroded by paying taxes.
How much TDS would I have to pay anyway?
The amount of TDS charged on interest income in a fixed deposit varies proportionately with the income. A higher income would be subject to a greater TDS. So, you end up paying higher taxes if you generate higher returns.
Early withdrawals in fixed deposits are subject to a penalty. You might want to invest your savings safely, hoping to get good returns. However, situations might require you to withdraw a portion of these funds immediately and cater to emergencies. In such cases, a penalty gets levied. Each time you break a fixed deposit, you may lose some money. Additionally, you may lose out on higher returns under favourable market conditions by investing in fixed deposits.
Investing in a fixed deposit may not be the best idea if you want to become rich. Investors usually resort to other asset classes to get higher returns. Although your invested amount in a fixed deposit remains safe and you do not get impacted by market risks, factors such as inflation, TDS and, in some cases, early withdrawals may erode a portion of your invested amount.