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Here's why you should not increase allocation to FDs despite rising rates

Here's why you should not increase allocation to FDs despite rising rates

Here's why you should not increase allocation to FDs despite rising rates
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By Anshul  Jul 22, 2022 8:11:38 AM IST (Published)

Fixed deposit (FD), also known as term deposit, is considered a secure investment option. But is it still worth investing in the current scenario. The answer is here:

Several lenders have recently hiked interest rates on fixed deposits (FDs). Considering this, investors may be wondering if they should increase their allocation to fixed deposits.

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While conventional investors consider it as one of the best investment options because of its risk-free nature, experts caution against raising allocation to it now.
“This is because returns from bank FDs are still way below inflation,” says Adhil Shetty, CEO, BankBazaar.com in an exclusive interaction with CNBC-TV18.com.
“Accounting for tax as well, the returns from FDs may very well be negative. So, unless FD returns are at least a couple of percentage points higher than inflation, they will not be an investment in the true sense,” Shetty adds.
Rachit Chawla, CEO & Founder at Finway FSC seconds Shetty’s views.
"Even with this increase, the FD is not a lucrative option for investment as it is still not at par with the rates that were enjoyed a few years ago, making fixed deposits a poor choice of investment. It remains on the lower side,” Chawla explains.
Also, experts believe that even if interest rates on bank deposits have increased, there will not be any further increase. However, one cannot rule out the importance of fixed deposits as an emergency fund.
“FDs are viable for short-term capital protection, such as in case of parking emergency funds. As interest rates are on an upward track, it is best to ladder investments and invest them for shorter periods so that investors can reinvest them on maturity to get higher returns. Laddering will also take care of liquidity issues and provide investors with regular returns periodically,” Shetty advises.
Now, let's understand laddering with an example.
If Mr X has to invest a lump sum of Rs 10 lakh in a 5 years' FD, he can divide it into smaller parts with the laddering technique. This can even be of Rs 2 lakh each across maturities ranging from 1 to 5 years. He can choose to invest smaller investments in shorter duration FDs and incrementally increase the quantum of investment into longer tenure FD’s.
With this, Mr X will have FD maturing each year which would provide the liquidity buffer. In case of emergency, he can liquidate the smallest tenure FD, thus, minimising the amount lost in the form of penalties.
Meanwhile, Chawla believes that one should allocate only 30 percent of assets in FDs now.
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
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