Recently, some banks, namely, HDFC Bank and ICICI Bank, have hiked their fixed deposit rates. HDFC Bank has increased its deposit rate on FDs by up to 75 basis points (bps), while ICICI Bank has increased it by 20 bps across select tenures.
So, in this era of increased deposit rates, should you also lock your funds in bank fixed deposits? Before answering that question, you should first find out whether FD rates will beat inflation.
Will FD Returns Beat Inflation Yet?
Though many lenders have raised FD rates, the returns from these instruments are yet to match inflation, say experts.
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Says Adhil Shetty, CEO, and founder, BankBazaar.com, a financial services website: “The FD rates in several banks are still around 5.5-6 per cent, indicating it is well below inflation. It will be a few more months before FD rates reach the current inflation rate.”
The headline inflation in India, which stood at 7.4 per cent in September, is also expected to have peaked.
“Globally, inflation is still high due to multiple reasons, from the supply-side constraints to the ongoing Russia-Ukraine war. So, the possibility of another rate hike in December is imminent. Also, the liquidity conditions in the market are expected to remain tight for the next few months. So, there is a good chance that the FD rates will go up higher in the coming months,” says Shetty.
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Does It Make Sense To Invest Now?
Says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm: “The objective of any investment is to meet future requirements. People look at bank fixed deposits as a virtually risk-free product. But is it really risk-free? Although banks have hiked fixed deposit rates, both the pre-tax and post-tax returns are still not able to beat inflation. Therefore, for investors whose risk tolerance level is moderately high, bank fixed deposits may not be an ideal long-term investment product.”
He elaborates. Suppose, the fixed deposit rate is 6.50 per cent per annum and inflation in India is around 7 per cent per annum, if you do not do not fall in any tax bracket, the inflation-adjusted return you will earn is -0.47 per cent per annum, he says.
“If you fall in the 20 per cent tax bracket, your post-tax and inflation-adjusted return will become -1.68 per cent per annum. People falling under different tax brackets will bear the impact as per their specific scenario. Your money will be depreciating by 0.47 and 1.68 per cent year-on-year (y-o-y) in the above case,” he says.
According to him, investors with moderately high-risk tolerance levels who are intending to start investing for goals that are less than three years away, should look into fixed deposits for investment purposes. This is because the markets are volatile and their investments could lose value in a bad year. This would protect their capital.
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He adds that where the investment time horizon is at least five years or more, proper asset allocation strategies in accordance with investment objective, risk profile, and economic scenario will generate inflation-beating returns.
“When the investment horizon is five years or more, at least a portion of the portfolio should be invested in equities. For instance, someone who is 30 years old and plans to retire at 60 can have up to 90 per cent or more of his/her portfolio invested in equities,” he says.
“People need to understand the difference between saving and investing. The biggest difference between saving and investing is the level of risk taken. Typically, saving helps one to earn a lower return, but with virtually no risk. On the other hand, investing allows you the opportunity to earn a higher return, but you take on the risk of loss. “Even if people perceive bank fixed deposits as a virtually risk-free product, inflation and tax are silent killers,” Sen adds.
