If you have Indian roots like me, the Fixed Deposit has been the go to investment advice passed on from Generations in our families. Even now questions like Should NRIs invest in Fixed Deposits, what are the bank rates for FDs for NRE accounts etc are common.
In my book, I challenged the notion of Fixed deposit is an amazing investment because its interest rates are an indicator of how the currency is losing value. My premise: if FDs offers an annual interest rate, there is a good chance that the current is losing its spending power by roughly the same percentage. At best, FDs are a good cover for hedging against inflation. If you want to read about Inflation, I found this interesting post.
The challenge with my approach is that I am trying to break against a long held belief. I have heard enough ideas in my time about how someone who just sold real estate at a great price should just put it all into Fixed Deposits and live off its interest for the rest of their lives.
I will take a detour from my views, and look at how things stand today.
What is so great about Fixed Deposits?
Fixed Deposits specially from banks offer a guaranteed return at the end of maturity. This is a preferred solution for risk averse investors, retirees and people who want an assured source of income.
That is not all, FDs offer as a guarantee for credit, or credit cards.
What does not work in favor of Fixed Deposits?
Fixed Deposits have a lock in, one has to commit to fixed time period of investment. In case of early withdrawal a percentage penalty is expected. Yet, this all fades when I say that the returns are simply not great and at best it helps only fight against inflation.
The problem is when investors do not think in these terms, where there were better returns to be made elsewhere. Unless there is a clear need to to have an assured maturity amount without risks, deposits are sub optimal decisions.
When does it make sense for an NRI to invest in Fixed Deposits?
The last two years have changed the financial markets in Europe and the US. Today in Germany the inflation rate is above 5%, and the interest rate on a deposit account is 0.01%. The amount of money in the economy has broken records, and this has caused the inflation rate to rise. The interest rate on deposit accounts is so low that it’s almost impossible to earn anything by keeping money in the bank.
With inflation rates on the rise, it can seem like a good idea to protect your money by investing in Indian Fixed Deposits. This strategy offers the advantage of protecting your money against similar inflation rates, while still allowing you to keep your money safe and accessible. It also is one of the easy solutions out there if you are in wealth preservation phase of your life.
A word of caution, there is expectation that rates should ride in the West might change this situation soon.
NRIs or Non Resident Indians can invest in Fixed Deposits through the NRE, NRO and FCNR types of deposits. Each of these have their advantages or use-cases. Broadly, NRE FD is a great bet because a good interest rate can be earned tax free. It is also allowed to repatriate (send) this money back to your foreign accounts. You can check current fixed deposit interest rates here.
While FDs aren’t perfect they still remain the easiest way to have some risk free returns. It is miles better than leaving your money in bank accounts with little to no returns. So, if you have no other choice, then you can still use them, but be aware it is not the best option out there!