The Foolishness of Striking Out Fixed Deposits from the Investment Portfolio

Risk is one of the most important factors when narrowing down on an investment product. Financial risk is usually based on factors such as age, investment goals, expected return on investment, etc. Broadly speaking, almost all personal investment products can be categorized as per the risk involved.

Stock Market investments and Mutual Funds are usually considered to be on riskier end of the investment scale as there is little protection offered for the principal amount or the returns on the amount invested. Savvy investors and those with an appetite for the high risk, high gains approach often take turn to the stock markets for their investments. Chosen carefully, the stock market offers some of the best opportunities for maximizing the returns on the money invested. A-List and B-list companies for example are a fair representation of this approach.

Savings accounts and fixed deposits on the other hand, represent the other end of the investment spectrum. Considered to be safe investments, the returns offered tend to be relatively lower. While savings accounts were traditionally known to offer the lowest interest rates, the scenario is changing rapidly following the freeing up of industry controls. Today, the savings account interest rates at some of the leading private banks in the country are higher than those that offered some years ago. Critics also cite the threat of inflation in discounting fixed deposits as a valuable investment. Some argue that the interest rates of any investment should be higher than the rate of inflation in-order to be cash positive.

While there may be issues, there are a few key benefits offered by fixed deposit investments and the same are discussed below:

• Fixed deposit investments are monitored by the Reserve Bank of India which is the central banking authority in the country. Thus, the fixed deposits held with recognized banks and authorized financial institutions are held to a higher scrutiny in comparison to other investment avenues, like the stock market, for example.

• Medium to Long term fixed deposit investments are eligible for tax benefits under the Income Tax Act of India. Categorized under section 80C of the Income Tax Act, the benefits can be claimed on investments not exceeding Rs 100000/- and the duration being capped to five years.

• Further, fixed deposit interest rates have risen steadily over the years and offer a fixed source of income that is deposited in the account at regular intervals. Taking advantage of this feature, quite a few individuals and families tend to invest their money in fixed deposits. In-fact, fixed deposits have proven to be quite popular with senior citizens in particular.

Whether you invest your money in the stock market or choose to park it in fixed deposits, there is no escaping the fact that the banking mechanism enabling the investments should be robust. India is fortunately home to a considerable number of banks and the private sector players have been known to be quite aggressive and forward in their approach vis-à -vis the public sector banks. At the end of the day, one must remember to arrive at a decision based on their own requirements and not follow the herd in something as important as this.