FD’s so old, but don’t erase them yet


One of the key factors in this migration is the low return on bank deposits. From an 8-8.5% yield until a few years ago, State Bank of India (SBI) one-year term deposits today offer yields of 5-5.50%. The low real return thanks to a higher rate of inflation is another reason for the exodus of bank deposits. Headline consumer price index (CPI) inflation in June remained stable at 6.26%. Inflation may have peaked, but is expected to remain high, according to Emkay Global Financial Services Ltd.

With inflation at higher levels, real yields on bank term deposits are expected to take another hit.

With increased levels of awareness, digital adoption, and product innovation over the years, investors, especially millennials, have started to shy away from fixed bank deposits. However, financial advisers say it would be wrong to avoid this old-fashioned instrument altogether.

“If FD investors are turning to debt mutual funds, to some extent, that’s fine. If investors are turning to equity or hybrid funds, then this is not a good strategy at all. These are two different asset classes. The risk and the potential return are different, the volatility is very high in the case of equities. It would be wrong to switch from FDs to equity-focused mutual funds based solely on returns, ”said Suresh Sadagopan, founder of Ladder7 Financial Advisories and registered investment advisor at Sebi (Sebi-RIA).

In terms of switching to debt funds, these funds also cannot yield significantly higher returns than current market interest rates. According to Sadagopan, debt mutual funds today offer returns similar to those of a FD bank, which are between 5.5 and 6%.

Nishith Baldevdas, founder of Shree Financial and Sebi-RIA, said most investors are leaving FDs because they find that after-tax returns are low. “When interest rates rise, returns on debt funds can turn negative. This is the biggest mistake investors make. In the debt asset class, an FD pays better compared to liquid or ultra-short funds, ”he said.

The average return on liquid funds over the past year is 3.17%, and 3.77% in the case of ultra-short funds.

“Most people don’t understand the risk of debt. People are leaving the FD because of the low rates; but FD returns are guaranteed. In other asset classes, returns are not guaranteed, ”Baldevdas added.

Another factor where FD banks score on mutual funds is building up an emergency corpus. Bank deposits can be liquidated at any time. When you redeem your mutual fund, you will usually receive the funds from you within one to five business days.

One of the big drawbacks of bank FDs is their low after-tax return. However, investors should keep in mind that while bank DFs may not work for investors in the highest tax bracket, those in the 0-10% bracket may find DFs attractive.

“For investors in the higher income tax brackets, DFs may not be the appropriate vehicle, as a majority may not be seniors and may not need a stable income. In terms of overall asset allocation, debt mutual funds might work better for them because they don’t need regular income unlike seniors or retirees, ”Sadagopan said.

Therefore, in the lower tax brackets, the after-tax returns of DFs are more competitive against debt funds.

According to experts, in terms of short-term goals and emergencies, there is no alternative to bank FDs. “Even at, say, 2 am you can withdraw money from an FD, such an option doesn’t exist in mutual funds,” Baldevdas said.

Financial advisers say that seniors who are retired should allocate debt to the asset class in such a way that the fixed portion must be secured. They should do this after understanding their cash flow and considering a safety bucket. Beyond that, retirees can subscribe to measures such as postal arrangements, then later switch to dynamic allocation and equity.

While FDs offer risk-free returns, experts also believe that low-yield bank FDs only work for conservative investors. “If millennials are looking for higher fixed returns, they can look to government programs like the Post’s Monthly Income Program. Please note, however, that they are fully taxable, ”said Mrin Agarwal, Founder of Finsafe India Pvt. Ltd.

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