From My Desk
Date 30-Apr-2014
Subject Busting common investor myths on money matters - Series 1
Details Myths -> "Bank fixed deposits are the only safe investment"

Reality -> "Other options are just as safe and offer much higher returns"

BANK FIXED deposits are considered the safest investment because they offer guaranteed returns. While this is true, the obsession with bank fixed deposits is not warranted.

First, these are not completely safe. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits of up to Rs 1 lakh per customer across all branches of a bank. This means that any deposit amount higher than Rs 1 lakh with a bank is at risk in the event of default by the bank. Secondly, a bank fixed deposit is not a tax efficient investment. Don't underestimate the impact of tax on your returns. Interest from fixed deposits will be taxed at the normal rate applicable to you. For a person in the 30% tax slab, a fixed deposit fetching 9% interest would effectively yield only 6.3% after tax.

Keep this in mind before deploying a chunk of your money in bank fixed deposits. There are now several alternatives to a fixed deposit, some of which may not be considered safe in the traditional sense, but are nevertheless low risk investments. Tax-free bonds issued by government undertakings, for instance, are at par with bank FDs on the safety scale. These offer the same rate of return, but the income is completely tax-free for the investor, making them a more tax-efficient investment.

FMPs from mutual funds are another alternative. They offer roughly the same yield, although this is not guaranteed. However, these are also more tax-efficient as they offer the benefit of indexation, which reduces the tax to almost nil.
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