Is it worth investing in bank fixed deposits?
Some of the top banks are offering interest rates (for senior citizens) up to 6.5%. Should you invest in them? Let’s find out.
Bank fixed deposits (FD) and public provident fund (PPF) are the two avenues that a person thinks of when he starts earning. In India, these two are the most used options for saving. Having said that, mutual funds too have now gained traction. For equity exposure, retail investors are preferring mutual funds as it also offers to invest in instalments known as Systematic Investment Plan (SIP).
At present, banks have increased their deposit rates that were at historical lows. Currently, the top 10 banks are now offering up to 6.5 % per annum (select banks) to senior citizens having deposits below Rs 2 crore. For non-senior citizens, they are offering up to 5.75%.
|
Historical Deposit Rates |
|||||
|
Year |
Savings Rate |
1-Year |
3-Year |
5-Year |
Above 5 Years |
|
2004-05 |
3.50 |
5.25 |
5.75 |
6.25 |
6.25 |
|
2005-06 |
3.50 |
6.00 |
6.75 |
7.00 |
7.00 |
|
2006-07 |
3.50 |
6.75 |
8.50 |
9.50 |
8.50 |
|
2007-08 |
3.50 |
8.00 |
8.75 |
8.75 |
9.00 |
|
2008-09 |
3.50 |
8.00 |
8.75 |
8.50 |
8.50 |
|
2009-10 |
3.50 |
6.00 |
7.00 |
7.50 |
7.75 |
|
2010-11 |
3.50 |
8.25 |
9.00 |
8.75 |
8.75 |
|
2011-12 |
4.00 |
9.00 |
9.25 |
9.25 |
9.25 |
|
2012-13 |
4.00 |
8.75 |
9.00 |
9.00 |
9.00 |
|
2013-14 |
4.00 |
8.75 |
9.25 |
9.10 |
9.10 |
|
2014-15 |
4.00 |
8.50 |
8.75 |
8.75 |
8.50 |
|
2015-16 |
4.00 |
7.25 |
7.50 |
7.50 |
7.30 |
|
2016-17 |
4.00 |
6.75 |
7.00 |
6.90 |
6.75 |
|
2017-18 |
4.00 |
6.40 |
6.75 |
6.70 |
6.75 |
|
2018-19 |
4.00 |
6.25 |
7.25 |
7.25 |
7.25 |
|
2019-20 |
3.50 |
5.00 |
6.20 |
6.40 |
6.40 |
|
2020-21 |
3.00 |
4.90 |
5.30 |
5.35 |
5.50 |
|
2021-22* |
3.00 |
4.90 |
5.15 |
5.35 |
5.50 |
|
* Up to September 3, 2021 |
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The above table shows the trend of deposit rates. You might have witnessed that 10 years ago, that is in the year 2011-12, the deposit rates offered was 9 to 9.25%. These rates were quite attractive then and was easily able to beat the inflation.
Say for instance, if you had invested Rs 100 in the year 2011 at the rate of 9%, then you could have accumulated Rs 153.86, whereas due to inflation, at the end of the fifth year, Rs 100 would be worth 142.12.
This means that the thing that you were able to buy at Rs 100 five years earlier, now for the same thing you need to shed Rs 142.12. With this the effective inflation works out to be 7.28%. Therefore, the real rate of return works out to be 1.72%.
|
Name of Bank |
For General Citizens (p.a.) |
For Senior Citizens (p.a) |
|
State Bank of India FD |
2.90% to 5.40% |
3.40% to 6.20% |
|
ICICI Bank FD |
2.50% to 5.50% |
3.00% to 6.30% |
|
HDFC Bank FD |
2.50% to 5.50% |
3.00% to 6.25% |
|
Punjab National Bank FD |
2.90% to 5.25% |
3.50% to 5.75% |
|
Canara Bank FD |
2.90% to 5.25% |
2.90% to 5.75% |
|
Axis Bank FD |
2.50% to 5.75% |
2.50% to 6.50% |
|
Bank of Baroda FD |
2.80% to 5.25% |
3.30% to 6.25% |
|
IDFC Bank FD |
2.50% to 5.25% |
3.00% to 5.75% |
|
Bank of India FD |
2.85% to 5.05% |
3.35% to 5.55% |
|
Punjab and Sind Bank FD |
3.00% to 5.30% |
3.50% to 5.80% |
|
Source: Bankbazaar.com |
||
The above table shows the present deposit rates offered by the top 10 banks for deposits below Rs 2 crore. So, let us assume that for the next five years, the inflation would be the past 10 years median inflation (5.79%) and you invest in the bank FD with the highest rate on offer that is 6.5% for senior citizens and 5.75% for general citizens.
In this case, the real rate of return works out to be 0.72% for senior citizens and negative 0.03% for general citizens. This means the present offered rates are just helping you to cope with the inflation but doesn’t seem to create any wealth for you.
Therefore, it makes sense to invest in bank FDs only from a saving perspective and not from a wealth creation angle. For wealth creation, mutual funds are the better option. So, thinking from the financial planning end, you can consider bank FDs for your emergency planning and mutual funds for your other financial goals.
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