Is Your FD Helping You Lose Your Earnings?

Posted by USFC Team on Feb 12, 2019 10:28:14 PM

Fixed deposits (FD) have been the preferred investment vehicle for investors looking to park their funds' infinite life goals. For Indians, this has included everything from their child’s education to retirement and even to weddings. Over the past few decades, FDs have been the go-to savings deployment tool to generate substantial interest.

But, despite that, the question of debate is: are FD returns really that lucrative? While an investment in a fixed deposit instrument helps to protect one’s capital, actual real returns generated from these investments have oscillated. Take for example the period between 2010 and 2013 when “real” returns hovered in a negative zone. Although a minor spike persisted between 2014 and 2017, the spread began to narrow again, distorting “real” wealth creation. The grim reality is that many investors tend to overlook the fact that persistent inflation can wipe out “real” returns. Investors who allocate their assets into an FD with the hope of fulfilling an aspiration purchase or capital call commitment, tend to fall short of fulfilling these expectations due to the anaemic returns resulting from inflation. In fact, India, traditionally, has witnessed double-digit inflation which has moderated between (5-6%) in the last few years; inflation is nothing but a hidden tax.

Let’s take a look at how this plays out on the graph below

Another way to study the impact of inflation on investments is to track USD/INR depreciation. Depreciation is typically a metric that mirrors inflation between 2 economies. In the case of the USD/INR, the rate of depreciation has been around 5% on average annually since January 2009.

What’s the solution?

Investors looking at stable, non-volatile avenues to secure their investments must also consider real inflation-adjusted returns as a benchmark and not just nominal interest rates. As part of their consideration, it makes sense to reallocate a part of their investment proceeds into a more stable asset class with a predictable return on investments. Currency diversification, especially in the USD, which has been one of the most stable currencies in the world, can act as a true hedge against global inflation. Cautious investors should also be reminded that in extreme equity volatility, diversification into other asset classes and currencies can provide serious capital protection and wealth generation.

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Topics: Investment, Dollar, USD, volatility, INR, Stable Investment, Dollar Investment, Fixed Deposits, Indian Fixed Deposits, Inflation, Non Volatile

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