One of the most preferred investment tools in our country, owing to their perceived stability and assured returns, is undoubtedly the Fixed Deposits. However, one thing is sure which we all cannot avoid, and that is inflation. The looming threat of inflation poses a significant challenge to the purchasing power and actual value of these investments.
Inflation, the gradual rise in the general price of goods as well as services, obviously has a direct impact on FDs, potentially eroding their value over time if not managed in a strategic manner. Our country has experienced varying inflation rates over the years, and while there have been tons of fluctuations, they have often tended to exceed the fd interest rate.
What is Fixed Deposit, and how does inflation affect it?
As the term implies, Fixed Deposit or FD is a financial instrument offered by banks and financial institutions that allows individuals to deposit a certain sum of money for a fixed period at a predetermined rate of interest. Keep in mind that this interest rate is higher than a regular savings account and is much more beneficial.
Further, let’s deep dive into the impact of inflation on Fixed Deposits.
Inflation refers to the gradual increase in the prices of goods and services with time. This leads to a decrease in the purchasing power of money. For example, if the inflation rate is 5%, it basically means that, on average, prices are rising by 3% per year.
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Reduced Real Returns
Fixed Deposits offer a fixed rate of interest. However, if the inflation rate surpasses the FD interest rate, the real purchasing power of the returns decreases.
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Impact on Returns
This investment tool comes with a fixed rate of interest for the entire term. If inflation rises after you’ve invested your hard-earned money, the fixed rate may not keep pace with the increased cost of living. This ultimately results in a reduced standard of living.
Top considerable tips to counter inflation
1. Opt for high-yield FDs
Search and invest in the fixed deposits that offer interest rates higher than the inflation rate. For example, I invested via Bajaj Finserv and believe me, this platform is simply the best. They provide special FDs with higher rates of interest than the regular ones.
2. Shorten the investment term
Consider opting for shorter-term FDs. Although long-term FDs typically offer higher interest rates, they also tend to lock your money for a longer tenure, making it very vulnerable to inflation.
(Tip: Before investing, use a fd interest rates lot size calculator.)
3. Review regularly and rebalance accordingly
Monitor your investments in a regular manner and make adjustments based on the prevailing economic conditions. If inflation changes significantly, reassess your portfolio allocation and consider reallocating funds to investments that offer better inflation-beating potential.
4. Portfolio diversification
Remember that putting all your funds in FDs alone is not a wise step. Diversify your investment portfolio across different asset classes. With this, you could easily safeguard your overall wealth.
Which is the best application to invest in FD and why?
Here, I’d like to share my personal experience with you all. Around a month back only, I was planning to invest in this tool. So, instead of visiting the financial institutions, I simply downloaded the Bajaj Finserv application. Believe me, with just a few taps, I was more than good to go.
You can simply download the application, which is readily available for both Android as well as an iPhone. Following this, with just a few steps, you’ll be able to invest in FDs easily. Moreover, it also offers a Fixed Deposit Calculator Online which is a must use tool before investing your money.
Conclusion
While there is no doubt in the fact that FDs remain a secure and safe investment tool, their susceptibility to erosion due to inflation necessitates strategic planning.
Therefore, as potential investors in our country, we need to diversify our portfolios and reassess our investment strategies to combat the erosive effects of inflation.
