At the moment, the fixed deposit (FD )rates are nearing an all-time high as few banks and non-financial companies (NBFCs) are providing 8.5-9.36% interest rates on an annual basis.
However, as an FD account holder, it is important to understand the drawback that this investment instrument may not be able to beat inflation. The investment will lose value in case the FD interest rates stay below the inflation rate. In the long run, this could pose a problem.
Inflation tends to impact the return value of the FD scheme. This is irrespective of the type of FD that an individual chooses.
The rate of return gained by the accountholder will be less than the inflation rate. This is why the return on the FD will not beat the inflation rate.
There are a few strategies that an individual can adopt to offset any impact on the returns in the long run. For example, one can consider diversification of the portfolio by investing in a mix of asset classes.
Also, when the market is experiencing inflationary issues, it may be advisable to go in for short-term FD schemes.
In addition, prior to investing, it makes sense to compare various FDs or different investment instruments and zero in on ones that comfortably beat the inflation rate.
An account holder can also look at the strategy of FD laddering This involves reinvesting the matured FDs for longer tenures at higher interest rates.
The key benefit is derived from the power of compounding as well as an individual is able to avoid locking in their money at one particular interest rate level.
So, as a smart investor rather than investing the entire corpus in a single FD, one can consider dividing their fund equally and investing it in FDs with different maturity periods.
For instance, in case an investor has Rs 6 lakh to invest in FDs, they can split it into three parts of Rs 1 lakh, Rs 2 lakh, and Rs 3 lakh and invest them in FDs with one-year, two-year and three-year tenures, respectively.
This way, when the first FD matures after say one year, one can reinvest it for another three years. In the same way, when the second FD matures after two years, one can consider reinvesting it for another three years and so on. This process of rolling over the FD schemes for longer durations will fetch higher returns.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
