Are FDs really worth enough?

As an investor you invest to earn a certain rate of return. In the volatile world that we live in today, these returns are getting more and more difficult to achieve. Stocks are getting battered. Gold has been falling too.
This has led many to park their funds in fixed deposits. With interest rates hovering at high levels, most individuals who took this option were happy with their choice. Even though the Reserve Bank of India has brought interest rates down, the returns being offered by the fixed deposits continue to be attractive.

At least this is what most people think. However the truth is far from this.

The reason for this is the concept of real interest rates. In simple words, real interest rate is the interest rate being offered by the bank less the prevailing inflation rate.
This makes you wonder whether keeping all your money in fixed deposits is really worth it. After all, the returns generated here hardly even cover the increased cost of living that you suffer on account of higher inflation. Taxes if and as applicable to you may further worsen the situation.

The chart below shows that the rate of interest being offered on fixed deposits has not even covered consumer inflation. This is considering the higher end of interest rates being paid on fixed deposits by the banks.

Source: RBI
* Interest rates on fixed deposits for more than 1 year maturity

So should you completely avoid fixed deposits?

Though fixed deposits do not offer returns that cover inflation, but they are still a relatively safer form of investment. Therefore, giving them a complete miss would not be a prudent idea.

The thing is we need to keep aside some safe cash as for short term needs. This will take care of our liquidity needs. Fixed deposits as such present a good avenue for parking this safe cash. After all, these deposits still offer safe and assured returns.

However, parking all your money in fixed interest instruments even for your long term requirements may not prove to be a right decision. You may fall short of funds for your long term goals. The purchasing power of the money decreases over a long period of time because of inflation. Therefore you need to invest in those asset classes that have the potential to beat the inflation.

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