Indians and Fixed Deposits

In the covid-19 pandemic many people lost their jobs due to several reasons. Those times were very difficult for them to even have a proper meal once a day.  That was the time when people understood the importance of saving and investments. And when it comes to saving and investing money most Indians prefer the old and traditional method such as fixed deposit. Now you must be thinking why fixed deposit? Well, let’s first understand what is fixed deposit.

A fixed deposit, also known as an FD, is an investment instrument offered by the banking as well as non-banking institutions to their customers. In fixed deposit you open an FD account, wherein you invest a minimum of Rs. 1000 while there is no upper limit, for a predetermined rate of interest which starts from 2.90% and ends till 5.50%. Different banks have different rate of interests. The rate of State bank of India starts from 2.90% to 5.40% on the other hand the interest rate of ICICI and HDFC bank starts from 2.90% to 5.50%. Whereas the interest rate of Canara bank starts from 2.90% to 5.25%.

 The invested amount is kept in the institution for a fixed tenure. At the end of the tenure, you get back your money along with the interest. You have an option of choosing a period ranging from minimum 7-14 days to maximum of 10 years. When you open a fixed deposit account at a specific rate of interest you are guaranteed the return at that rate of interest, irrespective of the fluctuation in the market. The interest you earn is either paid at the maturity or on monthly basis, based on your choice.

Back in 1995, the rate of return on fixed deposit was 13%, with flexibility, safety and assured and good returns the fixed deposit attracted a lot of customers. The only restriction in fixed deposit was once you invest an amount for a particular period you are nit allowed to withdraw it until the time is over, and if you wish to withdraw you have to pay a penalty. This is why an FD is also called as Term Deposit.  Fixed deposit was and still is an excellent investment vehicle for those investors who don’t want to bear any risk and Indians are one of those people who are risk averse. One might understand that there were not many options for investing in old days but today we have a variety of options available to invest our money like mutual funds, public provident funds, debt mutual funds, real estate, stocks, equity mutual funds, etc. but still most of Indians stick to fixed deposit. The reason is other investing instruments are quite risky and depends on the market. The market is an unpredictable place where today you might have gained a profit of 3.23% but you can’t say anything about tomorrow.

Even though fixed deposit has an assured return, the return is not that good. In 2003-04 there was a sudden fall in the rate of return in fixed deposit. Now the rates start from 3% and ends till maximum of 6%. People have come to know that, despite the fact mutual funds, stocks, are risky, the returns are quite high. As a result, the latest round of basis statistical data released by the Reserve Bank of India shows that the share of fixed deposit fell to 57.7% in 2017-18 compared to 58.9% in the previous year. Since 2008-09 the share of term deposit has fallen from 63.5% to under 58%. This shows that Indians are slowly and gradually investing in vehicles other than Fixed Deposits.