Planning an FD? It's time to rethink

The last few months have been quite hard on investors, with highly volatile stock markets and rising inflation working in tandem to erode their wealth. The steep fall in markets and continued volatility had lead to small investors considering shifting their funds to debt funds, and the traditional favourite fixed deposits. However, now that the rate of inflation has hit a 41-month high of 7.41%, thereby threatening to render the real rate of return on FDs unattractive, it is time to rethink.
While it often does not find favour with investment advisors, a sizeable number of small investors continue to repose faith in the ‘safe’ FD. At present, they also feel encouraged by the fact that interest rates are showing no signs of softening in the short-term.
Besides, RBI is expected to hike the cash reserve ratio (CRR) by end April, which could result in interest rates inching upwards, translating into higher returns on term deposits. At a time when investors are scouting for answers, it’s worthwhile to find out how people who manage others’ wealth the financial planners view FD as an investment avenue at this stage.
Says financial advisory firm Transcend director Kartik Jhaveri: “I wouldn’t recommend FDs to anyone at this point in time. The simple question to ask while making the investment decision is: Will the interest earned on FD be able to beat the combined effect of inflation and taxation? The answer is no, because for that, the FD will have to yield a return of more than 10%, which no bank offers at the moment.”
Most banks’ deposit rates today are in the range of 8-9% for 1-5 years. In case some bank is offering a rate of interest higher than other banks, it is essential to verify the credentials of that bank before locking-in your funds into its deposit scheme.
My Financial Advisor director Amar Pandit has a slightly different take on the subject: “In case of people who have already parked their funds in high interest FDs that offer an interest rate of over 9%, staying put would be advisable as they could lose out on the interest otherwise.
However, if they have invested in low-yielding FDs, offering a return of 5-7% and the FD’s maturity is some time away, they can look at exiting it after considering the penalty.” His advice for those who intend to renew the term deposits now or infuse fresh money into the same is to wait and watch. “If the expected CRR hike materialises, FDs can become attractive as the money will become dearer causing interest rates to go up. Therefore, loans as well as fixed deposits could command a higher rate of interest,” he adds.
However, Mr Jhaveri does not believe that the likely CRR hike would have any major impact on returns offered by FDs. “Even if the CRR — and consequently, the bank rate goes up, the increase will be marginal.” His recommendation includes fixed maturity plans (FMPs) and other near-term funds. One needn’t direct all the investment towards equity-oriented schemes, a major chunk can go into debt funds. “Other savings avenues may come with some degree of volatility, but they would at least maintain your wealth, if not grow it. On the other hand, if you invest in FDs in times of high inflation, it will act as a wealth destroyer,” he opines.
And what approach should senior citizens and risk-averse investors who are inclined towards investing in bank deposits adopt? Replies Mr Pandit: “f they must invest in FDs, it’ advisable to wait for some time to get better deals. They can also go for lucrative long-term double indexation FMPs. Senior citizens can opt for 9% Senior Citizens Savings Scheme, PPF (withdrawals) and well-managed monthly income plans, with an equity component of around 20-25%. Additionally, some exposure to debt funds can be taken if the CRR hike takes place.”