Most of you must have heard the word FD. Let us understand what it means and how it affects our investments.
· FD is short for ‘Fixed Deposit’. In India it is called ‘Fixed Deposit’ or a ‘Term Deposit’. It is called Term Deposit in New Zealand, Australia, and Canada, or a ‘Certificate of Deposit’ (CD in USA).
Name of the Bank / company
Investor’s name and address
PAN card number of the investor
Period of deposit
Date of maturity
Annualized yield (p.a) or Rate of Interest – 8. 5% etc.
Interest frequency – Quarterly etc.
· At the end of the time period of deposit, the original investment amount plus the interest will be returned to the investor.
A. For an initial deposit of Rs.10,000,
At the Rate of interest of 8.5% and
If time period for which the investment is made is 1 yr., and
Interest compounded Quarterly,
Amount received at the end of 1 yr. will be Rs.10,877
At the end of 1 year, Rs.10,000 becomes Rs.10,877. ie. an increase of Rs.877 on the initial investment.
Looks good, right?
Is it the actual case?
· Because, there is something called TDS or Tax deducted at source. All banks & companies deduct tax before returning your money, if the interest exceeds Rs.10,000 (as per SBI).
Take for example, TDS is 20%. On Rs.877, the tax deducted is Rs.175.40. You will only receive Rs.10,701.60.
Supposing Inflation is at 5.1%. It means, that Inflation eats into the interest earned on the Fixed deposit. Effectively, your Rs.10,000 one year back, invested at the rate of 8.5% interest is worth only Rs.10,191.60 today.
If the interest rate is lower than 8.5%, you can imagine how much you will be earning on your Rs.10,000!
Not very inspiring and motivating, is it?
So, should you invest your money in a fixed deposit for an effective 1.91% interest per year?
Yes and No.
· If there is a requirement for cash in the next few years, then it is prudent to hold the money in Fixed deposits. On the other hand, if you don’t need cash in the next few years, and you can invest for the long term, it is wise to consider other financial investment options which give better returns.