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Does fixed deposit give you the best returns?

Does fixed deposit give you the best returns?

Usually, no! FDs are the best only if you fall in the lowest tax bracket or are a retiree.

While bank fixed deposits are undoubtedly safe, their returns are poor. In fact, over a long period of time, they tend to return lower than inflation – so your purchasing power actually reduces if your money is stored in fixed deposits over long periods of time. Fixed deposits are useful only if you need the money within the next three years.

Over the long term, there is no alternative to equity if you want to stay ahead of inflation. You can either directly invest in stocks, or, if you lack the time & expertise, take the mutual fund route.

 Conclusion

Fixed deposits give assured returns. So, traditional investors have parked their savings in FDs. However, three things which need to be considered:

  • Fixed deposit returns are lower than inflation. Your money loses value over time.
  • Breaking fixed deposit or premature withdrawals always comes with a cost. It will be an inconvenience when money is required during an emergency.

At present, interest rates on fixed deposits are between 6% to 8%,depending on the time period of investment.Retirees, persons in the lower tax bracket or those needing money within 3 years can opt for fixed deposits.

Fixed Deposit : Choose the Best Option

Fixed Deposit schemes are offered by various institutions. It is very important for you to choose the best. Read on to know how.

Which fixed deposit should you go for?

In fixed deposits, safety is paramount – not half or 0.75 percent of extra interest.

The slightly higher rate of interest doesn’t really matter in the larger scheme of things, while an unsafe FD can give you sleepless nights later.Convenience and good service would be the second factor to look for.

We therefore advise going for a nationalized bank or one of the larger private banks – ICICI, HDFC, Axis or Kotak. Slightly less safe are deposits in cooperative banks.

Corporate fixed deposits can be quite unsafe– it really depends on the company you are investing in. Many companies tend to advertise their deposits and lure you with higher interest rates, so beware!

What term should you choose?

Fixed deposits longer than three years are not useful. The returns they give are poor, and often lower than inflation. For long term investments, you would rather go for equities, which can give better and inflation beating returns over the long term. On the debt side, PPF and public sector bonds (like NABARD or Indian Railways) are better for long term investments.

Below three years, the tenure you should go for really depends on when you think you need the money. Since there is a penalty for premature withdrawal, you might as well choose the tenure so that you are unlikely to break the deposit midway.

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