The Most Authentic Guide on Personal Finance and Investments

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Five Forbidden Rules of Fixed Deposits

Do's and don'ts apply to practically everything that we do. The idea being that we should be able to derive the maximum benefits besides protecting ourselves from the pitfalls, if any.

And, in this respect, our personal finances are no different. Various facets of our day-to-day money matters — loans, credit cards, investments, insurance, taxation, etc. — too are guided by certain principles.

In this particular article we look at the what we mustn't do when we make any fixed deposits.

1. Don't think of fixed deposits if you are a high tax-payer
Every rupee of interest income from fixed deposits is liable for tax. Obviously, therefore, if you feature in the top tax-rate slabs, it makes no sense to put your money into fixed deposits. With 20% to 30% money going away as tax, you will end-up earning extremely poor returns. Instead, you must explore other tax-efficient alternatives; and there are quite a few such options.

2. Don't risk your money with companies or co-operatives
The biggest risk with fixed deposits is the risk of default. There have been many instances where companies and co-operative banks have gone bust. As such, lakhs of investors have lost crores of rupees in an asset class in which they have such an immense faith. In this regard, public / private sector banks that are regulated by the RBI, score high on the safety aspect. 

Forbidden Rules : What you must not do with your Fixed Deposits.

3. Don't lose liquidity if your tenure is uncertain
Fixed deposits with companies are difficult to close prematurely. Though banks permit early encashment of their fixed deposits without any hassles, there is an issue. Suppose you have a 3-year deposit, which you need to suddenly withdraw after only a year. Here you will be paid interest at the 1-year deposit rate and not the 3-year rate that you had contracted while making the deposit. With debt mutual funds, your returns are not affected by early withdrawals.  

4. Don't depend on fixed deposits for high-inflation goals
Medical expenses and education fees are prone to high inflation. Fixed deposits, on the other hand, fail miserably to protect you from inflation. As a result, with each passing year the gap between your FDs and Goals will keep on widening. Hence, you would invariably fall short of your targets; unless you substantially enhance your investments. This, of course, is not a smart thing to do. Instead, you must ideally invest in products that have the potential to beat inflation.

5. Don't consider the siblings of fixed deposits
NSCs, NCDs, post-office schemes, bonds, etc. suffer from the same drawbacks as the fixed deposits. As such these and other similar products too can safely be ignored. The only useful investments in this category are EPF, PPF and Tax-free bonds... naturally because herein you don't have to pay any tax.

Those who shun the safety of fixed deposits and instead try maximizing their returns through "apparently" riskier products, are considered reckless. As if they are don't care if they lose money. On the contrary, they love their money a lot. So they listen to their minds and not their hearts when making investments. 

Exposing yourself to the 'risk of inflation' and 'risk of dubious schemes' is any day much worse than taking calculated bets on market-linked products. Unfortunately, a vast majority does not get this distinction right and continues to earn sub-optimal returns.

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