Fixed deposits and their close cousin recurring deposits are one of the most popular savings schemes in India. Their popularity stems from the risk-free nature of the money invested and the relative ease of managing them.
But after the 8 November 2016 banknote demonetisation by the Union government, fixed deposits have largely seized to be an attractive investment. Almost all major banks, both in the private and the public sector, revised their fixed deposit interest rates. State Bank of India (SBI), the country's largest lender, reduced its interest to 6.50% for maturity periods between three to 10 years. SBI is now offering the lowest interest on fixed deposits in the country. One-year SBI fixed deposits for less than 1 crore fetches 6.90% as interest.
On 24 November, SBI trimmed its interest rates for bulk deposits, between 125bps to 190bps, across various tenures. Deposits of over 1 crore are considered as bulk, and are typically made by high networth individuals and companies. Going ahead, SBI further cut rates for all bulk deposits for various tenures, making fixed deposits extremely unattractive.
Here are the current interest rates being offered by various banks.
If the above numbers doesn't convince you to not invest in fixed deposits, here are a few other reasons as to why you should not park your money in fixed deposits.
Low post tax returns
Fixed deposits in some of the new banks offer around 8% per annum as interest. It's usually 0.5% more for senior citizens. But what about the post-tax returns? For those in the 5% tax bracket it is unlikely to have an impact. But if you are in a higher tax bracket, the post-tax return will be reduced drastically. The 8% return will come down to around 6.5% for the 20% tax bracket and even more for those in the 30% bracket. Couple that with a 3.41% retail inflation and your fixed deposit interest income is scrapped further.
Lack of liquidity
Fixed deposits come with a mandatory lock-in period. This means that you won't be able to withdraw the money until maturity. Compare that with a liquid fund which allows withdrawal of money within a 24-48 hour notice, where the balance amount keeps earning the interest.
No investment flexibility
One of the biggest differences between a mutual fund and a fixed deposit is that you have no flexibility of investment in the latter. You cannot invest in a fixed deposit in phases. But in a mutual fund you can invest in monthly SIPs. You can choose the SIP amount according to your affordability, starting with as low as 500 per month. You may also increase it as and when your income increases. SIPs also help you exploit the benefits of rupee-cost averaging.
TDS on interest
If your income is taxable, TDS would be charged on the interest earned from the fixed deposit. It may not mind it because you have to pay income tax anyway. But tax on interest earned from your own money is not acceptable to all. Besides, there have been several instances where TDS has been imposed despite submitting form 15G/H. There have been cases where banks misplaced PANs and people had to show several papers to get the anomalies corrected.
Withdrawal penalty
You may withdraw your fixed deposit before the date of maturity. However, a penalty is charged in such a case, which usually varies from 1-2%. There's a formula to calculate the penalty for breaking the fixed deposit. The amount may seem low but if your investment runs into lakhs, the amount of penalty is likely to run into several thousands.
If you have already subscribed to a fixed deposit, stay invested. If you have not, go for an SIP in mutual funds. They offer better returns, ironing out the risks of a falling market.
