One of the chief mistakes Indians make with their money is to park their surplus funds in savings bank accounts and FDs. According to recent statistics, savings accounts, fixed deposits, and small savings schemes still remain trusted investment vehicles for millions of Indians. In fact, most of us grow up hearing about how fixed deposits are the safest investment instruments to grow long-term wealth from parents and relatives. While bank deposits and FDs are safe investment instruments, they are not particularly lucrative. In other words, the capital protection offered by FDs and bank accounts comes at the cost of inflation-beating returns.
Let’s understand the problems with fixed deposits to better understand this common mistake Indians make with their money. When you open an FD account, you pledge a certain sum of money with a bank/NBFC for a certain timeframe, earning a fixed rate of interest on the same. Fixed deposit interest rates can vary but usually hover around 6%-8% p.a., with an additional 0.50% for seniors. If you opt to break the FD before the end of the tenure, a penalty interest rate cut of around 0.5%-1% will be applicable on the same. Savings accounts, on the other hand, offer even lower rates of interest, with the average being around 2.5%-3% p.a. In a nutshell, bank accounts and deposits keep your funds safe but offer too little interest, making it equivalent to keeping your money idle.
Solution: Instead of investing money in bank accounts and FDs, invest your surplus funds in liquid mutual funds. Liquid funds have proven to offer better returns than bank accounts and FDs. Moreover, these funds have no exit loads, allowing you to redeem your investment as needed with zero penalties.