Is FD  good investment? If this question is on your mind, Then read this complete article.

Investors save their money for their future needs, like children’s higher education, child marriage, buying a house and retirement, etc.

In addition, most investors consider depositing their money in bank FD to earn some interest on their deposits.

You can see in the above image that state bank India interest rate for less than year is 6.25% to 7%, depending on age of the depositor, etc.

But your question is whether investing in bank FD is a good idea or not?.

Before telling about FD is good or not.

Let me explain when you will get profit from farming with an example.

In the above image, you can see that there is a farm image, cost image, mouse, and profit image.

When you are doing farming, if you recover only the expenses cost, will you get profit?

No, not at all. There is another hidden cost that you will ruin your profit.

Before you sell the crop to the buyer of the crop, at any point in time, a mouse can eat away the crop.

And this is also extra cost for you to pay from costs like seeds, labour, etc.

Similarly, when you are investing also, many believe that if they get some interest, that will be enough.

Factors to keep in mind while doing a fixed deposit investment? …

In the above image, you can see that you will get profit only after you can profit.

If you get profit over and above recoring the two costs. i.e., tax on interest; 2. inflation cost.

In addition, we have seen the SBI FD rate for the 1-year term is approximately 7%.

Tax-adjusted rate of return…

Now, let’s calculate the tax-adjusted rate of return for a 7% fd rate if you are in a 30% income tax slab.

The formula for that is TAR = Return*(1-tax rate).

 

You can see that the tax-adjusted rate of return is 4.9% after deducting tax from the rate.

Tax-adjusted real rate of return on bank fixed deposit interest rate…

We already calculated TAR.

Now, we need to calculate the second cost, which will ruin your FD investment profit.

I.e., inflation rate in our country.

Now we need to calculate the tax-adjusted real rate of return.

and the formula for that is TARR  =   (1+ TAR)/(1+inflation)-1

Here, the next 5 years, or 10 years exact inflation rate, we cannot assume.

But based on history and RBI monetary policy, we can assume that inflation will be in the range of 5% to 6%.

Tax-adjusted rate of return  =     (1+4.9%)/(1+6%)-1

Now, as you can see in the above image, after tax and inflation costs to your bank account, you are left with a “-” rate of return.

Hence, it is very clear that bank FD is not a good investment, especially for those who are in a higher tax slab rate.

And I suggest you always look at the rate of return after the expenses like tax and inflation.

Read the article about Debt Mutual Funds—all you need to know…

Also read: Is buying a house with a loan good?

and read about the time value of money—how it will help you in the right decisions.

Also read How to pay zero tax on your white money.

and read Why giving Tithe will make you poor?

Also read about the bank fixed deposit insurance scheme…

and read about child funds profit…

Also read why life insurance and investment should not be mixed?…

And read Life Insurance agents are making better profit than you—how? …

Also sign this petition to promote equity investment for longer-term goals.

And read about strategic asset allocation—all you need to know…

Also read about asset allocation and its importance.