Will money in a fixed deposit result in a large financial corpus?

Though fixed deposits are your most preferred investment option, there are certain facts to consider before locking your funds in an FD.

For long now, Indians have reposed their faith in bank fixed deposits. It is a type of investment wherein one deposits a certain sum of money for a particular period of time with the bank, and earns interest on the sum once the term of the deposit ends. Fixed deposits have always been a popular investment option, especially among those nearing retirement or those looking to create a large corpus of money for a specific financial requirement in the near future.

The rate of interest offered on the fixed deposit is uniform throughout the term of the FD. For example, if you deposit a sum of Rs 50,000 with the bank, and you are offered 8% interest on it, the rate of interest will be pegged at 8% till the deposit matures. Naturally, the longer you deposit the funds, the higher will be the growth in the FD.

Since the interest offered is uniform for the fixed deposit term, it is possible to predict how much the growth in the investment will be. You can find this figure by using an online FD calculator offered by banks. The rate of interest is higher for senior citizens; many people looking to grow their surplus money often deposit the funds in the names of their parents so that they may get higher returns with a larger rate of interest.

However, there is a catch to the entire FD investment scenario, and it is this: In order to get appreciable returns on investment, you must lock in a very large sum of money. This is connected to the uniform rate of interest being offered, which does not respond to market trends. Hence, you will find that by the time the FD matures, inflation has risen still further. Thus, the corpus you get may not beat inflation at all, and hence, may not accrue too much growth. Your invested money can gain appreciably only if it is quite high to begin with; for example, a sum of Rs 80,000 invested for two years will grow lower than a sum of Rs 5,00,000 deposited for the same amount of time.

Many investors are also unaware of the fact that the returns on fixed deposits are fully taxable. Hence, the money you are left with after the fixed deposit matures and you deduct the taxes, may not be much higher than your initial investment.

Thus, it is clear that if you must choose to lock your money in fixed deposits, it is more prudent to invest a large sum of money to get good returns on it.