PANKAAJ MAALDE,TNN
Traditionally investors park their savings either in bank fixed deposits or postal schemes. This indicates a bias towards safety and security of the principal amount over returns and liquidity. If the product is safe, it may not be liquid or it may give lower returns. On the other hand, if you want higher returns, then the principal might be at risk. Investors need to know what they are compromising on and for what. In India, most investors compromise on returns and therefore, we see huge inflows into fixed deposits. Fixed deposits have many disadvantages which you must be aware of.
Income is fully taxable
While investing, look at post-tax returns and not the gross returns being offered. The investment in fixed deposits and postal schemes are subject to normal rate of tax as per your individual tax slab, which reduces your overall return. Individuals in the 20% and 30% tax slab should reconsider their fixed deposit investments as at the end of the day, you are making the government your partner in profit. Through proper tax planning, you can save a huge amount of income tax.
Returns can't beat inflation
Normally, interest rates run parallel to the inflation rate, but it has been proven that in the long run, fixed deposits post-tax cannot beat inflation. If your investments do not beat inflation, then your long-term goals are likely to be affected. The cost of education and healthcare gallops ahead of normal inflation rates and need to be planned while investing in safe avenues. If you want to beat inflation by a margin, you have to take calculated risks.
Liquidity has its costs
There is no doubt that fixed deposits are liquid and can be broken whenever you need the money. However, liquidity comes at a cost. If you break fixed deposits prematurely, then you will not get the same rate of interest mentioned in the deposit certificate. You will end up getting a lower rate of interest.
Reinvestment risk
People renew their fixed deposit with interest again and again for longer and longer durations without analysing when they will need the corpus. You must know and finalise future financial goals and invest accordingly .In a falling interest scenario, if you make a fixed deposit for three years or more, it is likely that you will get a lower rate of interest when it matures. Most investors do not understand this risk which costs them a lot.
Only Rs 1 lakh is insured
Be aware that only Rs 1 lakh of your savings is insured. I am not saying that they are unsafe, but the rising instance of NPA in some banks is a major cause of concern. NPAs are like bad debts which are unlikely to be recovered. It is true that nationalised banks are government-owned and large private banks are too big to fail, but in fixed deposit, shifting it to other banks for ½ or 1% more can prove fatal.
While it is important to have debt in your overall investment portfolio, it should be limited to only a certain percentage of your total assets. This would depend on your age, time horizon of your goal and your risk profile. Nobody can deny the importance of safety, but you should also look for and evaluate other options which are equally safe but can help you generate better returns or can provide you better tax advantage.
PPF, the Sukanya Samridhhi Scheme and tax-free bonds are good options for the longterm. For the short-term, you can invest in ultra short-term funds, short-term debt funds or FMPs with a time horizon of 3 years plus. Arbitrage funds can be another useful option for a period of over one year. The main reason why these funds are not popular is because they are market linked and returns are not guaranteed.
We have allowed banks to earn from our savings and the government to become a partner in profit. With the changing times, you should also change your investment pattern. The scenario is not similar to that faced by your father or grandfather as we have moved out of the joint family system. The high cost of foods, along with the rising cost of education and health can spoil your financial future if you don't plan your investment. It is time to rethink and act as early as possible. It is always advisable to prepare a financial plan for the family before starting any investment which can solve many problems.
The author is a certified financial planner.
Income is fully taxable
While investing, look at post-tax returns and not the gross returns being offered. The investment in fixed deposits and postal schemes are subject to normal rate of tax as per your individual tax slab, which reduces your overall return. Individuals in the 20% and 30% tax slab should reconsider their fixed deposit investments as at the end of the day, you are making the government your partner in profit. Through proper tax planning, you can save a huge amount of income tax.
Returns can't beat inflation
Normally, interest rates run parallel to the inflation rate, but it has been proven that in the long run, fixed deposits post-tax cannot beat inflation. If your investments do not beat inflation, then your long-term goals are likely to be affected. The cost of education and healthcare gallops ahead of normal inflation rates and need to be planned while investing in safe avenues. If you want to beat inflation by a margin, you have to take calculated risks.
Liquidity has its costs
There is no doubt that fixed deposits are liquid and can be broken whenever you need the money. However, liquidity comes at a cost. If you break fixed deposits prematurely, then you will not get the same rate of interest mentioned in the deposit certificate. You will end up getting a lower rate of interest.
Reinvestment risk
People renew their fixed deposit with interest again and again for longer and longer durations without analysing when they will need the corpus. You must know and finalise future financial goals and invest accordingly .In a falling interest scenario, if you make a fixed deposit for three years or more, it is likely that you will get a lower rate of interest when it matures. Most investors do not understand this risk which costs them a lot.
Only Rs 1 lakh is insured
Be aware that only Rs 1 lakh of your savings is insured. I am not saying that they are unsafe, but the rising instance of NPA in some banks is a major cause of concern. NPAs are like bad debts which are unlikely to be recovered. It is true that nationalised banks are government-owned and large private banks are too big to fail, but in fixed deposit, shifting it to other banks for ½ or 1% more can prove fatal.
While it is important to have debt in your overall investment portfolio, it should be limited to only a certain percentage of your total assets. This would depend on your age, time horizon of your goal and your risk profile. Nobody can deny the importance of safety, but you should also look for and evaluate other options which are equally safe but can help you generate better returns or can provide you better tax advantage.
PPF, the Sukanya Samridhhi Scheme and tax-free bonds are good options for the longterm. For the short-term, you can invest in ultra short-term funds, short-term debt funds or FMPs with a time horizon of 3 years plus. Arbitrage funds can be another useful option for a period of over one year. The main reason why these funds are not popular is because they are market linked and returns are not guaranteed.
We have allowed banks to earn from our savings and the government to become a partner in profit. With the changing times, you should also change your investment pattern. The scenario is not similar to that faced by your father or grandfather as we have moved out of the joint family system. The high cost of foods, along with the rising cost of education and health can spoil your financial future if you don't plan your investment. It is time to rethink and act as early as possible. It is always advisable to prepare a financial plan for the family before starting any investment which can solve many problems.
The author is a certified financial planner.
Source:-The Times of India
No comments:
Post a Comment