1. The basic function of fixed income instruments like FDs is not to beat inflation, or to grow wealth, but to provide short-term safety, while not losing too much to inflation.
2. As Indian economy's general rate of interest is determined by prevailing inflation rate, FD rates are usually very close to it, leaving a miniscule amount towards asset building and wealth creation during earning years.
3. If inflation rate is equal to its returns, the purchasing capacity of products and services still remains at the same level, but if returns are lower, then buying power erodes, despite having saved over a period of time.
4. If the inflationary situation continues to be more than returns over several years, the purchasing power becomes worse off every year, leading to a precarious situation upon reaching the retirement age.
5. In fact, it becomes even worse for a taxpayer, as FDs are fully taxable at the person's slab rates during his earning years till 60 - tax exemption has been introduced upto 50,000 interest from this year, and only for senior citizens - unless he locks his savings in 5-year FDs for availing Sec 80C tax deduction allowed up to an aggregate of 1.5 lakhs only every year.
6. There is also a "reinvestment" risk in FDs where the reinvested money after maturity won’t earn the same return as the original FDs if rates keep falling as they are, and this can also happen during falling inflation too.
7. However, at the end of the day, the ways in which a person saves and invests during his earning years, and how he spends it for meeting goals and retirement needs, remain a very personal choice as per his own risk perception and mindset.
2. As Indian economy's general rate of interest is determined by prevailing inflation rate, FD rates are usually very close to it, leaving a miniscule amount towards asset building and wealth creation during earning years.
3. If inflation rate is equal to its returns, the purchasing capacity of products and services still remains at the same level, but if returns are lower, then buying power erodes, despite having saved over a period of time.
4. If the inflationary situation continues to be more than returns over several years, the purchasing power becomes worse off every year, leading to a precarious situation upon reaching the retirement age.
5. In fact, it becomes even worse for a taxpayer, as FDs are fully taxable at the person's slab rates during his earning years till 60 - tax exemption has been introduced upto 50,000 interest from this year, and only for senior citizens - unless he locks his savings in 5-year FDs for availing Sec 80C tax deduction allowed up to an aggregate of 1.5 lakhs only every year.
6. There is also a "reinvestment" risk in FDs where the reinvested money after maturity won’t earn the same return as the original FDs if rates keep falling as they are, and this can also happen during falling inflation too.
7. However, at the end of the day, the ways in which a person saves and invests during his earning years, and how he spends it for meeting goals and retirement needs, remain a very personal choice as per his own risk perception and mindset.