As the official inflation figure hovers above 7 per cent, here is the bad news. The return from fixed deposits could amount to nothing if the current rate levels persist because interest gains would be eroded by price rises.
Experts say investors, who have favoured FDs for security of capital, must look beyond safety and add some risk to generate real returns.
Most of the leading banks are offering interest rates of between 6 per cent and 6.5 per cent on one-year deposits whereas the inflation touched 7.31 per cent on Thursday. The consumer price index that governs retail prices is around 12 per cent and food inflation just short of 20 per cent.
“In the current scenario it is an eye opener as money lying in bank fixed deposits is actually money eroding,” said Sundeep Sikka, chief executive officer, Reliance Mutual Fund.
While banks are offering around 6 per cent on a one-year deposit, the return shrinks to below 5 per cent where income tax is applicable.
In such a case, the real rate of return, which is equal to nominal rate less the inflation, turns negative. In contrast, the BSE’s benchmark stock index, the Sensex has generated a compounded annual return of 23 per cent over five years despite its serious lows.
“In such a case it (FD) is not even covering one against the rising cost of living,” said Surya Bhatia, a Delhi based financial planner. “Investors should look at instruments that can at least cover them against inflation and start taking a little risk.”