The Middle Class Prefers Fixed Deposits, But Are They Dependable Tools Of Investment?

But how good or reasonable was this stead? Apparently not very good, showed a quick back-of-the-envelope calculation. This holds true not just for the charming and humble Prateet but also for most of the white-collar guests he served at the bar.

Even after a gradual increase in interest rates over the last two years, including the latest in recent weeks, FDs barely help manage your needs, especially when you compare them with other investment tools.

For example, a Rs 1-crore fixed deposit offers Rs 50,000-60,000 a month in interest. The monthly returns on a more realistic FD amount is even lesser for a family to depend on.

The average size of an FD in India is Rs 42,500. At 6 per cent interest you are looking at an annual income of Rs 2,550, or monthly earnings of just over Rs 200. Multiply the initial outlay by a hundred and you would net Rs 20,000 a month in interest earnings. That would be a reasonably good amount to live in rural India, but for that payout, you need Rs 42,50,000 in FD investments to begin with.

Why Does India Prefer FDs?

If fixed deposits are indeed such a depressing investment option, why are Indians running towards them?

For one, it is easy to estimate the returns on an FD on maturity, which helps if you have set time-bound financial goals. Two, FDs are amongst the safest investment options available as the investor usually does not have to worry about his/her initial capital outlay.

Three, FDs offer the investor an instant and easy ‘exit’ option. Though it attracts a penalty, the principal investment remains safe. The fourth and the most important reason is volatility in the markets. It is sometimes scary for investors, who would rather prefer a more predictable investment journey.

Thus, a variegated investment race is underway as most banks, non-banking financial companies and post offices compete to get the middle-class to pledge their last investible rupee. Tier II banks and financial institutions last week increased FD interest rates substantially to grab a larger pie of investments.

Curiously, big banks like HDFC and ICICI have stuck to their billets and increased interest rates only marginally, likely thinking that payouts have hit the peak and investment instruments now face intense interest air-pockets.

However, the State Bank of India has significantly raised FD rates—a bold move from a bank whose branch managers have often nonchalantly suggested that they “are not interested in small-investor savings and investments”.

The reluctance of most Indian banks in joining the higher-interest bandwagon is simple: they are watching the US Fed, and interest adjustments can be expected mid-March onwards, gathering pace from there on and firming up in June-July.

What's In Store?

Mind you, these moves will not be overtly positive for small and individual investors, more so as a shrinking global financial village desperately fights off inflation and begins easing monetary policy. The financial year 2025 is likely to be one of rate cuts. With the US, Japan, England and most of Europe following this financial correction mid-path, emerging economies will have little option but to follow suit.

Back in India, we have a situation where banks have already dangled the proverbial carrot and will find it unviable to string together an olive branch. Most are offering interest rates on investments close to their own lending rates and further upward revisions will not just be unfriendly to their balance sheets, it would be downright life-threatening.

If we look at the smaller banks like Jana Small Finance Bank Limited, Bandhan Bank and ESAF Small Finance Bank, their uppermost fixed deposit payouts are already north of 8 per cent and, in instances, approaching 9 per cent. ESAF Small Finance Bank, for one, made rate revisions on January 1, 2024, and its fixed deposits on Rs 2-3 crore investments now stands at 8.25 per cent for non-senior citizens and 8.75 per cent for senior citizens. That, indeed, is a zenith, one that would have been unthinkable just a few months back.

Enter NBFCs, which offer returns much higher than banks do. In savings accounts, while banks offer 3-5 per cent interest annually, NBFCs offer rates as high as 5-6 per cent on FDs, with this figure skyrocketing in some instances to never-before levels—Bajaj Finance offered a maximum interest rate of 8.6 per cent.

Of course, the predicament investors face when moving to non-banking institutions is financial risk, especially after debacles in organisations like Yes Bank, Punjab and Maharashtra Co-operative Bank and instances of management interference in other top-notch banks, leading to failures and a run on banks.

That brings in safety, which brings in post offices that are scoring high with their FDs. Even after investment insurance norms were revised, Rs 5 lakh is the upper insurance limit for deposits in any bank. Thus, in the case of default or collapse, the Government will pay a maximum of Rs 5 lakh to any depositor, regardless of the sum initially invested.

Post office term deposits not only offer high returns, they are also government-backed and free of interest rate volatility. In simple terms, market fluctuations have no impact on returns, interest rates remain steady and the investments become completely safe.

At the end of the day, it is a toss-up. One can follow the “No Pain, No Gain” analogy and run risks for greater reward, or play it safe and see returns lower by 100-150 basis points (1-1.5 per cent).

In fast-growing economies with a solid market impetus, people often play the equities game and get FD-equivalent rewards overnight. In tremulous times, this ‘Mayday Payday Approach’ is best avoided. It is a rough and tough call to make, especially when appetites are running low.

(The author is a New Delhi-based journalist and communications specialist. Views expressed are personal)