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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Aam investor gets dumb and dumber

Recently, a prominent newspaper published an article titled 'All investments come with risks, even bank FDs'.

In response to the same, a reader wrote a letter to the newspaper stating that "bank FDs are one of the safest instruments available to the investors. Since banks are well regulated by the RBI, they will not go bankrupt. Such articles, therefore, are for the more evolved readers."

Using this as a backdrop, I would like to make three important points.

Banks are not likely to default  
The gist of the aforesaid article was that banks can go bust. If that happens, the depositors can lose money even in FDs. So bank fixed deposits are not necessarily as safe as they seem to be. Technically, this is perfectly correct. From time to time, banks do fail.

However, world over Governments do not like the ordinary depositors to suffer. Plus, bank failures can lead to a cascading effect across the entire economy. So, more often than not, they bail out such "stressed" banks. Hence, I agree with the above-mentioned reader that the "risk of default" in a bank FD is very low. (Caution: I do not include co-operative banks in the safe list.)

Yet, bank FDs are not a safe investment
The aforesaid article did not touch upon the more "real and imminent" danger i.e. the risk of devaluation due to inflation. In fact, risk would be the wrong word here. Risk is something that may or may not happen. Whereas, as time goes by, money will definitely lose its buying power due to inflation. And, aam aadmi is no stranger to the pains of inflation.

Plus, FD income is fully taxable.

Why have you remained an uninformed, unintelligent and un-evolved investor?

Given that the loss due to inflation + tax is typically more that the interest earned, investing in an FD is invariably a losing proposition. Most people fail to appreciate this because in absolute terms they are receiving more money than they had invested. But relatively they are poorer because now, with the same amount of money, they cannot buy the same goods as they could do in the past. 

Is there a "safe and sound" solution?
This is not the real issue here. I have already answered this question many times in the past and again very recently in my post 'How to earn tax-free risk-free income'.

The real crux of the matter and the really important question to the aforesaid reader, who wrote the letter to the newspaper, and to the millions who, like him, believe in the safety of bank FDs is this...

Despite all the opportunities, why have you remained an uninformed, unintelligent and un-evolved investor?

I wonder why you don't educate yourself financially and become an "evolved" investor. It is a matter of investing just a few months of your time... and the benefits will accrue to you for your entire lifetime.

Every year you send your kids to different classes to learn new things. Isn't it high time you too learned some new stuff?

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

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