Bank FD with 7.5% p.a. interest looking attractive? Don't get too excited. Read this first
Updated: Mar 15
Banks are currently offering higher interest rates on FDs. Many banks are offering 7-8% interest rates on FD now and some small finance banks are giving around 9%. And senior citizens are benefitting the most as mostly all lenders offer them a higher interest rate than those offered to the general people. So, seeing the lucrative returns, many investors consider it the best time to opt for Bank FDs to earn high and assured returns. But before doing so, read this below -
Inflation Rate in India (CPI Jan 2023 data released by the Government of India) = 6.5%
Pre Tax FD rate = 7.5% p.a.
Tax Rate = 30%
Post Tax FD Rate = 5.25% p.a.
Hence, the Inflation rate (6.5%) > Post tax FD rate (5.25%)
What that means is, inflation is rising faster than the income you're generating from Bank FD and if you're parking your money in Bank FD, your purchasing power will DECREASE every year.
Then, what is the alternative, to generate a positive real return?
Bank FD with Rate > 9.3% p.a. (but be wary of the credit quality/ repayment capacity of bank FD/ bonds offering such a high return)
Debt Mutual Funds (if you don't like volatility in your portfolio) - Higher return than Bank FD and lower tax rates applicable
Hybrid Mutual Funds - if you want to generate post tax returns > inflation rate in India
Equity Mutual Funds - if you can stay invested for 5-7 years.
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