Fixed Deposits can’t be intelligent investors choice for wealth creation

While fixed deposits (FDs) have their advantages, they may not always be the most suitable choice for intelligent investors seeking to maximize their returns and achieve their financial goals. Here are some reasons why FDs may not be the best option for intelligent investors:

1.Taxation of Fixed Deposits returns

Interest earned on fixed deposits is considered taxable income and is added to the investor’s total taxable income for the year. The interest income from FDs is taxed according to the investor’s income tax slab rate. An investor in highest tax bracket will end up paying 30% tax on Fixed Deposit returns. That means for a person in highest tax bracket post-tax returns of fixed deposits offering return of 7% p.a. is just 4.9%.
After factoring in taxes, the net returns from FDs may be significantly lower than expected, thereby reducing their appeal as an investment option.

2.Poor Real Rate of Return

The real rate of return refers to the return on investment adjusted for inflation. While fixed deposits offer a fixed rate of return, this rate may not always keep pace with inflation, leading to a poor real rate of return.
The average inflation rate in India for the last 10 years is 5.5%. So, for a Fixed Deposit which is offering pre-tax return of 7% and post-tax return of 4.9%, the real rate of return is going to be negative after adjusting inflation of 5.5%. That means for an investor wealth is not getting created rather it is getting eroded with fixed deposits.
Inflation erodes the purchasing power of money over time, meaning that the returns generated by FDs may not be sufficient to maintain the investor’s standard of living or preserve the real value of their investment.

3.TDS (Tax Deducted at Source)

Banks are required to deduct Tax Deducted at Source (TDS) on the interest earned on FDs if the total interest income exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens).
The TDS rate is 10% if the investor’s Permanent Account Number (PAN) is furnished to the bank. Otherwise, the TDS rate is 20%.

4.Inflexibility

FDs have a fixed lock-in period during which the invested amount cannot be withdrawn without incurring penalties. This lack of liquidity can be a drawback, especially in emergencies when immediate access to funds is required.

While fixed deposits (FDs) are considered a safe investment option for preserving capital and generating stable returns, they may not be the most effective choice for wealth creation, especially over the long term. Investors looking to build wealth should consider alternative investment strategies that offer higher growth potential. Here are some alternatives to FDs for wealth creation:


Equity Mutual Funds

Equity mutual funds invest in a diversified portfolio of stocks, offering the potential for higher returns compared to FDs over the long term. Investors can choose from a variety of equity mutual funds based on their risk tolerance and investment goals, such as large-cap funds, mid-cap funds, or diversified equity funds. The long-term average returns of Equity mutual funds are around 12% which is far better than any other available investment option for a long-term investor.

Index Funds and Exchange-Traded Funds (ETFs)

Index funds and ETFs track specific market indices like the Nifty 50 or the S&P 500, providing investors with exposure to a broad market index at a lower cost. These passive investment options offer diversification and the potential for long-term capital appreciation, making them suitable for wealth creation.

Systematic Investment Plans (SIPs)

SIPs allow investors to invest small amounts regularly in mutual funds over time. By investing systematically, investors benefit from rupee cost averaging and can take advantage of market volatility to accumulate units at different price levels.

Investment in Gold

Gold has been traditionally considered a safe haven asset and a hedge against inflation. Investors can consider allocating a portion of their portfolio to gold through gold ETFs, or gold savings schemes offered by mutual funds.

As far as wealth creation is concerned, historical data shows that equity is the best asset class in long term. Investors should know that equity may be risky but risk get reduced significantly over a long period of time.
Regardless of the investment option chosen, diversification and asset allocation are key principles for wealth creation. By diversifying across asset classes and investment options, investors can reduce risk and optimize returns based on their financial goals and risk tolerance.