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Investing in long term FD? Rethink your strategy
By SiliconIndia | Monday, 18 July 2011, 04:21 Hrs |
5 Comments
A fixed deposit is often termed as Lazy man's investment. Investing in a cash flow asset will produce regular fixed payouts. The risk factor in this is you may not be able to reinvest the payed out
interest at desired rates. This is known as reinvestment risk, and this effects all the fixed income assets and FD bonds.
One factor that is important to note is that, fixed deposit rates are never steady. They keep altering. A year back the rate for 1 year deposits was 6.5 to 7 percent. And now the same banks offer 9 percent
for the same duration. Don't be surprised if you find the rate hiked to more than 9 percent in future.
Consider a case when you make an investment in fixed deposit when the interest rates are high. But when your FD is matured the interest rates are low, in such a scenario you are forced to reinvest the
maturity proceeds at interest rates that are not benefiting. At times you are trapped in a dilemma of breaking your FD by paying penalties.
In short the reasons why fixed deposits are not a long term good investment option is because:
Low returns: Because FDs are very low risk instruments, they offer low returns comparable to alternative investment options
Fixed period: Your money will be locked up in a fixed deposit for the duration of the deposit. As a result, unlike a savings bank deposit, you will lose the flexibility access your funds as needed.
No tax benefit: There is no tax benefit in this investment, unlike the infrastructure bonds or the National Savings Certificate (NSC). So, even from a taxation point this is not the best of investment options.
Penalty on a premature ending: If you break the FD before maturity period you will have to pay a penalty. The bank decides how much penalty you will need to pay depending on when you break the FD.
Other than fixed deposit, mutual funds and stocks are other investment options for investors to invest their funds.
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Reader's comments(5)
1:
Are there inflation indexed bonds in India yet?
There should be some way of getting atleast inflation meeting returns after taxes guaranteed else there is little point in saving money now and getting less later.
The returns on FD are 9% today which after taxes are less than 7% when inflation itself is 10+%
There should be some way of getting atleast inflation meeting returns after taxes guaranteed else there is little point in saving money now and getting less later.
The returns on FD are 9% today which after taxes are less than 7% when inflation itself is 10+%
Posted by:kapil
- 20 Jul, 2011
2:
But still i recommend FD as one of the best saving option. It gives less interest depend on time time but return and base value is always secure.. IN Mutual funds i had invested 45 k approx 3.5 yrs back and even after this stage i am not able to get 45 k from that investment. So secure option is FD or NSC. And even we have tax saving option in FD also which is 5 yrs term deposit and we can save tax on this.
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Posted by:Rajat Bajaj
- 19 Jul, 2011
3:
Then what is good,Everything has got it s own pros and cons
Posted by:kola
- 18 Jul, 2011
4:
I totally disagree with all the points discussed here. What ever benifits that are mentioned in other instuments they don't even give the returns of deposits, often in other instruments the charges itself amount up to 4% to 6% and there is no gaurantee on the capital invested. Instead of getting interest payed out you will get charged debited every month with hardly any gain in NAVS. Instead of vagely saying please provide example of other instuments where the gains are higher.
Posted by:Madhavi
- 18 Jul, 2011
5:
i do not agree. fixed deposit as the name suggest give fixed returns but not with out risk & tension. mutual fund do not guarantee any return but given a good market it can give higher returns compared to fixed deposit but it also gives tension and is risky .
kamlesh bookseller Replied to: prabhakar
- 19 Jul, 2011
Beautiful and dress selection, please go to Dresses
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