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How to Grow wealth using FD
Fixed Deposits (FDs) are the most popular investment option in India. When the investment wasn’t even a very big thing, FD was ruling India’s investment industry with its 10-12% annual returns along with Gold and Real Estate. But over time, returns offered by fixed deposits have declined by over 50% and now they’re offering only 6-7% annual returns. It is a little higher than the savings account annual return and just enough to hedge against inflation.
Fixed Deposit is an investment product that offers guaranteed returns and has a very low risk. This is a very good investment product for risk-averse investors who are looking for a fixed interest rate over a specific period of time without any risk of losing their money.
But, FDs have its own set of risks involved, such as:
- Inflation Risk: Sometimes the return of FD may not keep up with the inflation, reducing the value of your money.
- Credit Risk: The possibility of bank defaulting
- Reinvestment Risk: Interest earned may be reinvested at a lower risk
- Liquidity Risk: Penalties for premature withdrawals
Here's a table comparing the Risk, Returns, Liquidity, and Tax benefits of FDs and other Investment Vehicles.
| Investment Vehicle | Risk Level | Return Potential | Liquidity | Tax Benefits |
|---|---|---|---|---|
| Fixed Deposits (FD) | Low | Fixed [low to moderate] | Moderate (penalties for premature withdrawals) | Interest is taxable |
| Mutual Funds | Medium to High | Variable [High] | High | Tax Benefits under certain schemes |
| Stocks | High | Variable [High] | High | Dividend income is taxable, capital gains tax applicable |
| Public Provident Fund (PPF) | Low | Moderate | Low (15-year lock-in period) | Tax-free returns, eligible for tax deductions |
| Gold | Medium | Variable [Moderate to High] | Moderate | No regular tax benefits, capital gains tax applicable. |
| Real Estate | Medium | Variable [Moderate to High] | Low (difficulty in selling quickly) | Tax benefits on home loans, capital gains tax applicable |
| Bonds | Low to Medium | Fixed [Low to Moderate] | High (depends on the type of bonds) | Interest is taxable, tax benefits on certain bonds |
| Cryptocurrencies | Very High | Variable [High] | High | No regular tax benefits, capital gains tax applicable. |
How a financial advisor can help you invest in Fixed Deposits
The very first step a financial advisor will make you to is to understand your financial goals, risk tolerance and time horizon. This will help you identify what investment vehicles you should choose to reach your financial goal within your risk limits and time. It will also help you understand if fixed deposit is a right fit in your investment portfolio or not.
They can also guide you in selecting the right bank or financial institution factoring in interest rates, time allocation, and other offers. They make you aware of all the terms and conditions associated with FDs, ensuring maximum returns while minimizing risks.
A financial advisor also help you diversify your portfolio to maintain risk and returns. They recommend a mix of investment vehicles, such as mutual funds, stocks and bonds to ensure you reach your financial goals. They also monitor your investment portfolio and suggest on readjusting your portfolio as per market conditions.
A Financial Advisor's expertise and guidance can help you optimize your investment and achieve financial stability and growth.