The Fixed Deposit has been the go to investment option for most people over the ages. They are generally safe and give decent returns with respect to interest and inflation. The recent drop in fixed deposit interest rates have made the investors a little unsure about the profitability of investing in them. This was reaffirmed when a client called me a couple of weeks ago wanting to discuss investment opportunities and showing little or no interest in FDs.
I realized that this might be something on the mind of most lay investors and many like him may be finding the low interest rates a deterrent in putting up their hard earned earnings and savings in this financial instrument. I then decide to use the client’s fears as a case file to help clear the air around fixed deposits.
The client had about 6 lakhs to invest and was completely unsure about FDs. The low interest rate of 6.5% was a major deterrent. It felt like poor return for his money as compared to other options. I went ahead and explained to him that the interest may seem low but the FDs were still giving a similar return as they were earlier. The returns were same when computed against inflation and taxation. The idea of a low sounding percentage presents a mind block leading to bad investment decisions.
Another factor to keep in mind when deciding for or against FDs is the time duration of investment. FDs are excellent investment options for short and mid-term investments as they are by nature non-volatile, but they may not be the soundest investments when considering a long-term investment. For e.g., let’s imagine that a person has two children. The elder one is studying in the tenth standard and the younger one in seventh. They would like to create investments such that they have enough money when the children start college in their respective times. In such a scenario investing in FDs and debt funds for the older child will make much more sense than for the younger child.
Most lay investors make the mistake of taking into consideration the NOMINAL return rather than the REAL return. Real return constitutes of returns after taking into consideration taxes and inflation.
When deciding on financial investments it is imperative that the investor think about their goals and not about the products. This is quite evident from the above example. The investment opportunities will differ with regards to not just the time duration but also the end purpose. The mantra here being, focus on goals and not on products.
My client was looking at investment opportunities in equities. His reasoning was simple. In his own words ‘I am bullish on India and believe that equities are the way to go to make more money”. As an investment consultant, I too am bullish on India.
I have always been bullish even when the markets were down and the financial picture was quite abysmal, and always will be, irrespective of the economical scenario. Personally my investment strategies are not affected by current market conditions; they are decided by my goals and needs. And it is this very advise that I offer to all my clients and to all those who seek any kind of financial consultation.
This particular client was a young person and he did give me his investments. Since his needs were long term, we decided to opt for equity investments.
I would like to surmise by saying that always keep in mind your goals and time duration before you chose a financial instrument for your investments.
