Fixed Deposit: Fixed deposit is the most preferred and traditional investment option. Because, along with the fixed returns, security is also guaranteed on it.
In India, fixed deposits have been a favorite investment option for investors, especially senior citizens, for a long time. Actually, FD guarantees security with fixed returns. This is an ideal option for retired people as most of them are looking for fixed income. But meanwhile, many people remain unaware that inflation has a dangerous impact on the real value of their savings over time.
Fixed deposits: truth or fallacy in terms of security
Inflation is the rate at which the general level of prices of goods and services increases. Due to this, the purchasing power of money i.e. its ability to buy decreases. In simple words, the thing or service which you can buy today for ₹ 100, will not necessarily be available to you for the same price in the coming few years.
On the other hand, fixed deposits are an investment option offered by banks, where investors deposit a lump sum amount for a fixed period at a pre-determined interest rate. In this, along with the principal amount on maturity, the final amount is given according to the fixed interest. This makes it a risk-free investment option. But the thing to think about here is whether it is really risk free? Because inflation is increasing with time.
Effect of inflation on FD
Let us understand this with an example – suppose you have invested ₹ 1 crore in an FD scheme at an annual interest rate of 6%. At first glance, this seems to provide a good return. But if inflation increases at the rate of 5% during this period, then the situation changes completely. According to this –
At the end of the first year, your FD investment will grow to ₹1.06 crore. But when adjusted for inflation, its real value will be around ₹ 1.01 crore, which seems quite low for a big investment.
- Your return at the end of the 10th year will be ₹ 1.79 crore, but after inflation its value will be only ₹ 1.10 crore.
- Your return at the end of the 20th year will be ₹3.21 crore, but after inflation its value will be only ₹1.21 crore.
- This shows that within 20 years, inflation has wiped off about ₹2 crore or 62% from your FD returns.
This calculation represents an important point for Indian investors, especially senior citizens, who rely heavily on fixed deposits for their post-retirement income. But nominal returns in FDs affect their real value as well as purchasing power.
What should senior citizens do?
In this situation, these methods can prove effective for senior citizens:-
1. Consider other options in your portfolio
Instead of relying only on FDs, consider adding other options to your portfolio. These include options like mutual funds, stocks, REITs, gold and bonds, which have offered better returns in the long run compared to FDs.
2. Systematic Withdrawal Plans (SWPs) of Mutual Funds
SWPs allow you to invest in mutual funds with proper asset allocation and withdraw a fixed amount systematically. This can be an alternative to FD, which can provide better returns after tax.
3. Inflation Protected Securities
Consider investing in inflation-indexed bonds, which adjust principal and interest payments for inflation. In this, protection is offered against the declining value of money.
4. Stay updated
It is important to understand the pace of inflation and its impact on savings. Periodically review and adjust your investment portfolio to ensure that it is in line with current economic conditions and your financial goals. Financial experts can help you in creating and managing your portfolio along with making investment strategies as per the current circumstances.
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