Barring few banks, fixed deposit return or interest rate are heading continuously southwards with very few offering rates @ 7%-8%, more so after the scrapping of the high-value currency notes in the financial system which pumped in considerable liquidity. Here are 4 reasons why with the present low interest rates, bank FDs are a bad idea.
1. Fail to meet your long-term wealth creation plan:
Saving on money or still retaining on the purchasing power is possible with a Bank FD. But long-term financial goals or wealth creation can not be meted with Bank FDs. Though a product by default, in nearly every investor's kitty, retirement planning or corpus creation for a child's education, marriage is not possible.
2. Negative Real Returns: The average 6%- 7% interest rates on bank FDs cheered by banks are just showy. As in a scenario, where inflation is also to be accounted for real returns and in a general case is ought to increase at the rate of 10% on an annual basis, the return of 7% of bank FDs do not provide for the simultaneous increase in inflation levels.
3. Taxation Issues: Interest realized on bank FDs is taxed at the individual's income tax slab rate. For an FD of Rs. 10 lakh with a maturity term of 1 year earns Rs. 70,000 as interest. Tax implication for a person falling in a higher tax bracket of 30% will be Rs. 23,666.
4. Safer options such as Debt funds and Company Fixed deposits to park money in: Company fixed deposits with high credit rating as well as other debt instruments are far better in terms of safety, convenience, taxation as tax in case of debt funds is payable only at the time of redemption plus indexation advantage is also available. So, a debt fund for a short term in place of bank FD can be considered for better net yield in the hands of investor.
Debt funds also come with a feature wherein when you have additional funds at your disposal you can top-up your current investments to realize better returns.