High inflation can reduced your fixed deposit close to zero

Last year all the banks reduced their fixed deposit rates for almost every period. Currently, according to official inflation figure is above 7 per cent which is a bad news. The prices of almost everything are very high. So the returns from fixed deposits might amount to nothing if the current rate levels continued as all the interest earned will be absorbed by price rises.

According to experts investors, who invested in FDs for security of capital, should think more than safety and add should take some risk to earn real returns.

Currently interest rates being offered by leading banks ranges between 6 per cent and 6.5 per cent on one-year deposits and on Thursday the inflation have touched 7.31 per cent. The retail prices are managed by consumer price index is currently around 12 percent and food inflation is just short of 20 per cent.

Sundeep Sikka, chief executive officer, Reliance Mutual Fund stated, “In the current scenario it is an eye opener as money lying in bank fixed deposits is actually money eroding.”

Although banks are offering 6 per cent interest on a one-year deposit but the return earned gets reduced to below 5 per cent in case it comes in income tax range.

Also, in such case the real rate of return, which is equal to nominal rate less the inflation, turns negative. On the other hand, the BSE’s benchmark stock index, the Sensex has earned a compounded annual return of 23 per cent over five years regardless of 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.”