You may have heard people regret their careless spends and compare it what could have been if they had put it in a fixed deposit (FD) instead. Rethinking that they could have earned much better from it. It is common for an average Indian, especially those from an older generation to support and encourage locking money in an FD or a small savings scheme at the post office and they are not entirely wrong in doing so.

Back in the 80s and 90s, a common person did not have much access to stock markets or rather did not have the means to understand stock markets to invest in equity. Through post office and chit fund agents, they humbly accumulated their savings in schemes that promised high returns.

What attracted them towards the schemes was the low-risk factor as well as the assurance that was provided by the agents (whom they personally knew) and the government.

Unlike past years, investors today have access to an abundance of products that can be customized to meet personal financial goals. Additionally, we have the internet just a click away to just "google" whatever instrument we fail to understand.

Given the higher inflation rates at present and the lower interest rates, shouldn't you reconsider the decision of putting your savings solely in fixed deposits?

Inflation

India's reported real CPI (consumer price index) inflation rose to 4.87 percent in May on paper. If you were to park your deposit in a nationalized bank (say SBI) after making a fair comparison of FD rates across the country for one year, you will get 6.65 percent interest, which means you are barely beating inflation. And, if you live in a city, your expenses are bound to be much greater and you have to rethink if you should be lock-in your hard-earned savings just to barely get by.

FD and other investments

One cannot compare FD to mutual funds or equity investments as they are very different vehicles and also carry varying amounts of risks, but you may have heard that you can stand to gain 10 to 12 percent on equity. This does not mean you expose yourself to all the risk from equity to gain higher returns, but you can rather divide your funds based on your age and income. Parking all your money in just FD or just equity will make no sense. You have to make your money work for you and for that you will have strategically redistribute them.

Tax savings

India has some good interest-bearing fixed deposits but you should be aware that interest earned on these are fully taxable. You should be aware that your bank deducts 10 percent tax (TDS) before interest payment if the income exceeds Rs 10,000. To save tax, you can invest in tax-saving FDs but these too come with a lock period of 5 years at the least, which is a long wait.

The motive of the article is not to discourage you from investing in bank FDs but to consider other options like tax-saving mutual funds like ELSS, equity and if you still like FDs, you can think of safe non-bank FDs and small finance bank FDs.