Bank FD and Inflation
What is a Bank FD or Bank Fixed Deposit?
A bank Fixed Deposit is a Time deposit that offers to pay a certain amount of interest on the amount kept in it for a predetermined time. Once the period is over, pre-decided interest is paid on the amount(also known as principal), and the Fixed deposit account is closed. If the amount is withdrawn before the decided period or the FD is prematurely broken then, the interest paid is based on the number of days for which the amount was kept and not for the whole term as the entire term still needs to be completed. So in short it gives you flexibility to honor the full term and enjoy higher interest or withdraw in between as the need arises with lesser interest. An FD is the most convenient and popular form of investing almost everyone who has a bank account or knows about a bank sooner or later heard about an FD or has done it ever in his/her lifetime.
Due to the convenience of parting money from a savings bank account, and does not involve much trouble of mind as to where to invest? an FD is a no-brainer investment that people don't even think One basic question that whether or not is it enough return generating to beat the growing inflation? For people who do FD the primary thing that's in their mind is that it is offering fixed return though how low it is and their principal is safe as it is with the bank.
How FD loses the battle against Inflation :
Fixed Deposits (FDs) often fall short against growing inflation because their interest rates are usually fixed and may not rise in tandem with inflation. As inflation increases, the real value of the interest earned on FDs diminishes. For instance, if an FD offers a 6% return but inflation is 7%, the effective return is negative, meaning the purchasing power of the invested money declines. This erosion of value can significantly impact long-term savings, making FDs less effective in preserving wealth. Understanding this dynamic is crucial for investors, as it highlights the importance of seeking investment options that better combat inflation. Moreover on the taxation part when at maturity the interest is paid, the tax is applied on both principal and interest as a result the overall net return comes down to less than 6% as per the above instance. So here it is really imperative to think that is FD the right investment option to beat inflation , or the flexibility and safety is paramount than inflation?
