Banks have increased interest rates for fixed deposits (FD) over the past year, passing on some of the 250-basis points increase that the Reserve Bank of India (RBI) has made in the repo rate since March 2022. But still, your FD might not be able to beat inflation, especially if you fall into the highest tax rate of 30 per cent.
Consider this: According to a report from FundsIndia, HDFC Bank is offering a one-year FD at 6.6 per cent. After taxes, the return works out to 4.62 per cent. Similarly, ICICI Bank and State Bank of India are offering 6.7 per cent and 6.8 per cent, but the post-tax return comes to 4.69 per cent and 4.76 per cent, respectively, which are below the expected inflation rate of 5.1 per cent for FY24.
The RBI’s Monetary Policy Committee (MPC) recently lowered its inflation forecast for FY24 marginally from 5.2 per cent to 5.1 per cent. The MPC now predicts inflation of 4.6 per cent for the first quarter (April-June) of this fiscal year, 5.2 per cent for Q2, 5.4 per cent for Q3, and 5.2 per cent for Q4.
It is for this reason that experts suggest investing in equities, as they tend to offer higher returns compared to other asset classes such as FDs, gold, and real estate. A report by FundsIndia shows that equities have delivered returns of 16.7 per cent over a 20-year period, while gold has provided 12 per cent, real estate 9 per cent, and debt 7.2 per cent. Clearly, equities tend to outperform other options over the long run.
For those unfamiliar with investing in equities, the best way is through systematic investment plans or SIPs. With SIP, you can invest a regular amount every month, quarter, or year, effectively averaging your buying cost over the long run.
For example, if you had started investing Rs 10,000 every month in any of the top large-cap mutual funds 20 years ago, your portfolio would have grown to Rs 1 crore at an assumed rate of 12 per cent. Just by investing regularly, the amount of Rs 10,000 per month would have made you a crorepati. Similarly, if you invest Rs 50,000 per month, you can achieve the goal of Rs 1 crore in nine years and two months.