How inflation kills Fixed Deposit interest how we can work around it?
Investing in fixed deposits (FDs) is a popular and seemingly secure option, especially in India. However, inflation significantly erodes the real value of returns over time, posing a hidden risk. Let’s break down the impact of inflation on FDs with points and calculations for clarity.
1. What is Inflation?
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- Inflation refers to the gradual increase in prices of goods and services over time, reducing the purchasing power of money.
- For example, Rs 100 today buys fewer goods or services in the future due to inflation.
2. How Fixed Deposits Work
- FDs offer guaranteed returns at a fixed interest rate over a specific duration.
- They are perceived as safe investments, especially for conservative and senior investors.
3. The Hidden Risk: Inflation
While FDs provide nominal growth (the total return without considering inflation), the real growth (adjusted for inflation) tells a different story.
4. Impact of Inflation: A Case Study
- Initial Investment: Rs 1 crore
- Interest Rate (FD): 6% per annum
- Inflation Rate: 5% per annum
Year-by-Year Breakdown:
| Year | Nominal Value (FD Growth) | Real Value (Post-Inflation) | Purchasing Power Lost |
|---|---|---|---|
| 1 | Rs 1.06 crore | Rs 1.01 crore | Rs 5 lakh |
| 10 | Rs 1.79 crore | Rs 1.10 crore | Rs 69 lakh |
| 20 | Rs 3.21 crore | Rs 1.21 crore | Rs 2 crore (62%) |
Key Insights:
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- In 20 years, inflation erodes nearly 62% of the purchasing power of FD returns.
- While the nominal value grows, the real value barely increases, affecting financial security.
5. Why FDs May Not Be Sufficient
- Post-retirement income and daily expenses, like medical costs, rely heavily on savings.
- Inflation diminishes the real value of FDs, making them inadequate to cover rising costs over the long term.
6. Alternative Investment Strategies
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- Diversify Investments: Include market-linked options like equity mutual funds, which often outpace inflation over the long term.
- Balanced Portfolio: A mix of fixed-income instruments (like FDs) and growth-oriented investments can provide both security and inflation-adjusted returns.
- Inflation-Linked Products: Consider products designed to beat inflation, such as inflation-indexed bonds.
While fixed deposits offer a sense of reliability, their returns are significantly diminished by inflation over time. Retail investors should assess the real value of their savings and diversify investments to ensure long-term financial security. Adjusting your investment strategy can safeguard purchasing power and provide better outcomes against inflation’s erosion.
All values, calculations and our content are based on our own assumptions /thoughts /information’s available on internet. Please consult with your financial advisor before making any investment decisions based on this article. Vijay Broadcast is not responsible for any Profits / Losses. Thank you for reading, and we look forward to sharing another interesting article with you soon!