Why you should not invest in Fixed Deposits & Recurring Deposits for long-term

As per Reserve Bank of India’s ‘Handbook of Statistics on the Indian Economy-2014’ , the total investments made in bank deposits (including fixed deposits) by the Indian households were to the tune of Rs 6,722 billion. Around 57% of household savings are invested in bank deposits. So, Fixed Deposits and Recurring Deposits are the most preferred Financial Assets in India.

What are the main reasons to invest in a Fixed Deposit? Why are FDs/RDs the most favored investment avenue in India?

  • Bank deposits serve the purpose of preserving capital (principal).
  • They give a stable and fixed return on the invested money. We prefer to invest in ‘guaranteed’ returns oriented financial products. (Kindly note that Fixed deposits with Banks up to Rs. 1 lakh only are backed by deposit insurance.)
  • Money in a bank account is safe.
  • Bank Deposits have good liquidity. They can be closed and the principal can be withdrawn within a few hours / days.
  • Ease of investing and convenience is also very high with bank deposits.
  • If an investor had lost some monies by investing in Mutual Funds / stocks, he/she prefers to invest in safe bets like Fixed Deposits or Recurring Deposits. So, bad investment experience with equities is also an important factor.
  • FDs and RDs are used as investment tools to achieve short-term financial goals and also to accumulate an emergency fund.

So there are lots of benefits investing in fixed deposits. But, are they tax-efficient? What about post-tax returns on Fixed Deposits? Can FDs and RDs deliver decent inflation-adjusted investment returns? Are Fixed Deposits good as long-term investment? Are there any other better fixed income investment avenues?

Fixed Deposits & Post-Tax Returns

On an average, a typical 5 to 10 year bank fixed deposit can generate returns of around 8 % to 9%. We generally talk about the pre-tax returns and do not give that much importance to post-tax returns (the interest earned on fixed deposit is taxable). Let us understand about the calculation of post-tax returns with an example.

For example – if you invest say Rs 10,000 in an FD at 9 per cent interest rate, interest earned during the first year would be Rs. 900. But, you need to pay taxes on the interest earned. If your income tax slab rate is 30%, that means you need to pay around Rs 270 as taxes.

The pre-tax returns from your bank FD is 9%. But after paying the taxes, the post-tax returns is just 6.3% only, which is much lower than the presumed return.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

                               6.3% = 9 { (100 – 30) / 100}

Fixed Deposits & Inflation adjusted Post Tax Returns

We need to discuss one more factor here i.e., INFLATION. One rupee say in 1947 is not the same as one rupee today, both in terms of purchasing power and appearance 🙂 . Do you agree with me?

If inflation is around 8% and if your investment earns 7% returns then your wealth is getting eroded. You are actually not making any money. This concept is called ‘real-rate of return’ or ‘inflation-adjusted returns’.

Let’s continue with the above example to understand the effect of inflation. If you factor in inflation, the post-tax returns of 6.3% will come down to -1.57%. Indeed, you get negative returns on your investment.

Inflation adjusted & Post Tax returns = { [( 1+ post tax return ) / ( 1+inflation rate )] – 1 } * 100

                           -1.57% = { [ (1+.063) / (1+.08) ] – 1 } * 100

If you continue with a 10 year FD, just imagine the impact of taxes and inflation on the returns generated.

Below chart gives you an overview of how the investment value of a Fixed Deposit decreases over a 10 year period. In this example, I have assumed the rate of interest on Rs 10,000 FD as 9% pa (annually compounding), inflation rate as 8%, income tax rate @ 30% and the tenure of FD as 10 years.Fixed Deposits Investment values

Without considering the taxes and inflation, the maturity value of this 10 year FD  of Rs 10,000 would be around Rs 23,600. If you consider Inflation adjusted and Post-Tax returns of -1.57%, the maturity value is Rs 8,536.

(Same is the case with low-yielding investments like Life insurance money-back / endowment policies, these will give you negative returns. Do not mix insurance with investments)

When one should opt for Fixed Deposits?

One of the most important aspects of successful investing is spreading your money in different kinds of investments, depending on your investment period.

You can definitely consider investing in a FD / RD, if your financial goal is a short-term one and preserving the capital is your utmost priority.

For example – You want to accumulate a corpus to fund your Kid’s donation fee for primary education, over the next 12 months or so. In this scenario, opting for a RD / FD makes sense. Another scenario can be, when you want to accumulate a fund to meet any unforeseen expenses (‘emergency fund’), you may consider investing in shorter-tenure fixed deposits. Retired people could also make the best use of this avenue for securing a fixed and steady income.

Other Investment Avenues

Fixed income securities or Debt-oriented products should be part of your investment portfolio. There are no second thoughts on this. But the point is, try to identify and  invest in tax-efficient fixed income options.

These can be :  Public Provident Fund (PPF), Tax-free Bonds, Debt-oriented Mutual Funds, Hybrid Mutual Funds, Monthly Income Plans of MFs etc., If possible take little bit of risk and invest in a top-rated Company Fixed Deposit too.

Besides the above mentioned investment options, do consider allocating significant portion of your savings (disposable income) to Equity related investment avenues. Invest in Equity Mutual Funds (if not in direct equity – shares) for your long-term financial goals. They are not only tax-efficient but also can beat inflation.

Investment in a property (real-estate) can also be a better option (but prioritize your financial goals before investing in a property through a home loan).

If you prefer to invest only in Fixed Deposits and Recurring Deposits, it is for sure that your investment value (wealth) will get eroded over the years. If you choose to invest in various investment avenues, there is every chance that your portfolio can give you positive inflation adjusted post-tax returns. Do calculate the inflation adjusted returns on your fixed deposits & RDs (if any).

Do not allocate your entire savings to Fixed Deposits or Recurring Deposits just because they are safe and give your guaranteed returns. The caution is not to use the fixed deposit as a long term investment avenue. Remember, it’s the RISK that gives your money the best chance to GROW.

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(Image courtesy of jscreationzs at FreeDigitalPhotos.net) (Education cess & surcharge not considered in calculations)

  • V RAVEENDRA says:

    i am a government employee and making prompt IT returns and presently how to invest money in BANK FD’s and and how to fill the IT returns for he interest amount.

  • Mahadevan says:


    I have 20 lakhs in fd and i have no other income, no monthly other income monthly expence 15000/-

  • Vishu says:

    Hi Sreekanth,

    My father has retired with lump sum amt of 20 Lakhs in hand to invest. Where can i suggest him to invest so as to get best monthly returns.He has a house to run with approx 30k per month exp. He pension is of around 28k and has a daughter to marry off in abt 5 years wich will require approx 10 lakh spending He was thinking of dividing the money into FD’s and investing FD intrest to Liquid funds so as to save tax and maximise intrest earning

    • Sreekanth Reddy says:

      Dear Vishu,
      Living expenses of Rs 30k are taken care of by his pension.
      Marriage goal : To accumulate Rs 10 Lakh in 5 years from now, at expected returns of 10% , he has to invest around Rs 6.20 Lakh. You may suggest him to invest in aggressive MIP Fund (Ex – Birla Sun life MIP II Wealth 25 plan) for next 5 years.
      Read : Best MIP Funds
      He may maintain around Rs 1 Lakh as an Emergency fund in mix of FDs + Cash + Liquid funds.
      The reamining balance is around Rs 13 Lakh. May I know what is the investment objective? Is it accumulation (or) to get monthly safe/fixed income?

  • Sachin says:

    Dear Sreekanth,

    I have total Rs. 22 Lacks in FDs. How much should I invest in Debt funds. I can stay invested for at least 5-8 years,

    35 yr age & no liabilities. 2 children. Salaried employee. Toatl income from me & wife is 73K.

    Kindly reply.

    • Sreekanth Reddy says:

      Dear Sachin,
      Why do you want to invest in Debt funds? Do you have any other existing MF investments?
      Have you planned for your Kids’ education goal & for your retirement?
      Kids’ Education goal planning & calculator.
      Retirement planning made easy!

      • Sachin says:

        Thanks for the reply Sreekanth.
        Yes I have already invested about 6.5 L in MF’s as on date, Starting this October. (65% equity & 35% debt). 10% are ELSS funds.All are 4/5 star funds as per VROL.
        But I feel some risk in investing more money in equity as market trend is downwards right now. Hence deciding to go with low risk Debt funds.Is it correct? What would be the market trend in next 10 years?
        For kids education I have been investing in SSY/PPF. For retirement planning I have not done anything apart.
        I have term insurance of 50L (critical illness rider 5L) ICICI pru +10L ULIP, ICICI pru WB. Medical insurance 3L from employer.
        Pl suggest how should I go for further investments.


    Is it a good idea to invest lump sum amount in Dynamic bond fund for three year time horizon to get 9-10% return?

    • Manja says:

      Hi Ram,
      There is no guarantee of the returns, but yes, a average performing Dynamic Bond has given min 9% is past. With falling interest rates, bonds may have better returns. In terms of the risk, Liquid funds are least risky, then Ultra Short term, Bonds, Gilt. Do check out the exit loads (penalty if withdrawn earlier then stated duration) of any funds, Liquid and Ultra Short funds usually do not have any exit load. Others generally do.


    I want to invest my retirement corpus of about 1 crore for generating monthly income of about Rs. 50000/- which should be tax savvy and want to invest remaining amount in equity mutual fund for atleast five/six year for growth and inflation beating return. I have to keep Rs 10 lacs for marriage of my son and 6 lacs as emergency fund. Please suggest me the asset allocation of debt and equity instruments. I want to remain in 10% IT bracket.

    • Manja says:

      Hi Ram,
      If you have corpus of 1 crore (minus 16 lakhs) and looking for just 50K p.m, then you are looking for just 6.5 – 7 % interest rate. You need not invest in any mutual fund, Just go for FD from different bankswith Quartely payout (I am not sure if there are monthly payouts). However, you may consider part of investment in Liquid / Ultra short term funds which will provide you high liquidity.

      You haven’t specified the duration for the 10 lakhs. If it is within 1 – 2 years, do not deviate from FD / Liquid / Ultra short. If it is atleast 5 years, then you can check on the Equity Mutual funds. For emergency, stick to Savings account (with Sweep in) or Liquid funds.

      Since even a 5% return on 1 crore is 5 lakhs p.a, you cannot remainin 10% IT bracket.

      Please note, I am just a user, Sreekanth may have better view.

    • Roy says:

      You can consider investing in Tax saving Bonds (NHAI, REC – allotment going on till March 2017). They pay half yearly and give returns that are completely tax free. Their rate of return is around 7% p.a. . So for a corpus of 1 Cr, you will get 3.5 Lacs every 6 months. This amount is totally tax free.

  • Sabu T says:

    If I invest the interest I receive from FD into equities would the overall returns beat inflation ?

    • Dear Sabu,
      May I know why would like to implement this strategy? Isn’t it better to invest in equity oriented products directly for long term goals instead of taking this indirect route?

      • Sabu T says:

        This is to ensure the capital at least is safe in case equity products didnt perform well in short term and I am forced to withdraw due to any emergency. I understand FD gives low return. But if the end return from FD if invested in equity oriented products there are 2 scenarios. 1) Equity does not do well – I have the capital safe + Whatever is left of the equity investment 2) Equity does well – I have the capital + Returns from FD + Earnings from equity on returns from FD

        • Dear Sabu,
          I believe that this investment strategy is a complex one. Kindly keep it simple.
          Kindly note that interest income from FDs is taxable income.
          Also, the corpus amount required for your long-term goals may not be achieved if you just invest interest income in equity oriented products.

  • Amit Dixit says:


    I have made FD of value 125,000/- INR, interest at 7.25%. for period 12months.
    How much return did I get after completion? Is there any tax deduction.
    As of my knowledge I get a return of amount 9,062/- INR.

  • Ravi Krishna says:

    Hi Srikanth,
    I have 4 lakhs in my savings account. For a one year horizon, can i invest in any debt based liquidity fund which can give me 9-10%return. FDs are giving very less return now.

  • Srishti Gupta says:

    how should i allocate my money to achieve a near goal of 2 year of acquiring Rs. 50 Lakhs??

  • ravichandra says:

    Hi Sreekanth,

    I am 34 years, i have a property worth 35 lakhs which i bought 3 years ago. my total expenditure on the property is 27 lakhs including EMI & loan repayment. I have completely repaid the loan.

    i am thinking of selling the property and deposit for monthly returns, please suggest me whether i should sell it or not.

    Which option is better selling the property and deposit in bank or keep the property for growth.

    Property is located in Tavarekere- magadi road – ganesh nagar layout.

  • sreejith says:


    i have NRI status and would like to know about better investment option suited for me, maintaining the tax free advantage if possible

  • Mohan says:

    Thanks for your inputs Sreekanth. Very valuable..
    Could you please suggest the best financial institutions that offer the best FD in the market as on today (March 3rd, 2016) – preferably national banks.
    Also, can you confirm if the TDS amount on FD interest is based on the tax slab that we fall under?

    • Dear Mohan,
      TDS @ 10% is levied. But if you are in different income tax slab, you may have to pay taxes accordingly.
      (Banks deduct TDS on interest only if the interest amount for an FD greater than Rs.10,000 per year. The rate of TDS deducted by banks is 10% on interest income, provided your PAN number is available with the bank. If the bank doesn’t have your PAN in its records, TDS is deducted at 20% on interest income.)

      Kindly read: TDS & misconceptions.

  • Amrutha says:


    I have surplus amount of 1.6 lakhs, so I want to keep the money in Post office MIS and expected earnings can be diverted to my existing PPF account and besides that I am investing through monthly SIP in Birla Sun Life Frontline Equity Fund (G)(3000/-) , Franklin India Prima Fund (G)(2000/-) and IDBI Diversified Equity Fund – (G)-2000/-
    I want to seek your suggestion reg surplus amount as I don’t see more future earnings at this point time, can I take this option being a house wife of two girls children?
    Your suggestion is much appreciated.

    • Dear Amrutha..May I know your investment horizon for MF investments & kids’ ages?
      If you want some guaranteed periodic income then you can consider investing the amount in PO MIS.

      • Amrutha says:

        Thanks for you input. Soon I am going to overseas for next 4 years where my husband works and wanted get good corpus for future needs of my daughters aged 6 and 11 after 10 years. So I wanted to keep the amount in PO Mis, if you suggest better alternative it will be helpful to me regarding the above question. thanks

  • feroz says:

    my mother age 56 i need months income expenses pension plan or MIP i invest lump amount 10 lakhs i want to every months credit bank a/c Rs.10,000 p/m which better plan

    • Dear feroz,
      MIPs (Dividend option) may not guarantee you any fixed payment on a monthly basis.
      If safety of capital and guaranteed payment are your objectives then you may stick with FDs only.
      Does she has health insurance cover?

      • feroz says:

        mother name have max bupa health insurance 2 lakhs but no term insurance or life insurance i trying to without medical test insurance and i try to bank orf borada saving a/c with insurance 1 lakhs cover without medical test upto age 60

        • Dear feroz..Let me know your query??

          • Srinivas says:

            Dear Mr.Sreekanth,
            I am 57 years old and retired few months back. I am to receive 30+ lakhs as my retirement benefits. I have a disable brother,another brother whose income is less and I have to finance these people.
            Kindly let me know where I have to invest to have a monthly income of 20000/-. I am not risk averse but at the same time , I prefer to be a little conservative.

            I retired from a pvt sector and I do not get pension.

          • Dear Srinivas Ji,
            Kindly save 6 to 12 months of your living expenses as an Emergency Fund. You can invest this amount in multiple FDs/RDs. Also, get yourself adequately covered with an health insurance policy.
            Consider investing in options like : Bank FD + Post office MIS + a small portion in MF MIP-Growth Fund. Once your become a senior citizen, consider Post office Sr.Citizen Savings Scheme.
            Kindly read:
            Best Portals to compare health insurance plans.
            List of Best investment options in India.
            MF MIP schemes.

  • Sanket says:

    Hi Sir,

    Please suggest the correct way to invest in debt mutual funds for 1-2 years time frame either through monthly SIP or a lump sum amount in one go at starting and then let it to grow.

  • bubai says:

    Hi sir,

    My father is 70+ and Rs 10 L was matured just few week ago from his earlier FD.

    What he should do ? Show he again reinvest in the FD ( recently FD rate is very low) ?

    Please advice …

    Thank you

    • Dear Bubai,
      Let me know if he has any specific goal? Or just want to invest in a safe & guaranteed investment avenue?

      • Bubai says:

        Hi sir,

        He is a pension holder. No such goal.

        His plan – put it as a FD (7.5% -8% I guess) in some bank.

        Invest to some MF for upcoming 5 years with the Monthly interest coming from that FD.

        Father asked me for any better option to utilize the money.

        And I ask for your advise… 🙂

        Thank you

        • Dear Bubai,
          Your father can consider investing some portion of the surplus money in a MIP-Growth option. Kindly read : Best MF MIP Plans. Remain invested for say 2 to 3 years.
          The balance amount can be invested in 1 to 2 year Bank FD.
          In case, if you do not need money for say next 5 years or so, you can consider investing a small portion in a balanced fund like HDFC Balanced fund or TATA balanced fund.

  • Anup MV says:

    Dear Sreekanth,

    I need your advice for better investment options than FD. Say, if I have accumulated certain amount and I need to invest it, what should I consider as a better bet?

    Anup MV.

  • Puneet says:

    Hi, I want to invest Rs. 100000 for my newly born daughter. where should i invest to grow money for her future?

  • Raman says:

    Hi Sreekanth,

    I am 49 years old . I have invested in Mutual Funds and FDs. I want to know which is more beneficial . My objective is to get good tax return and also park some for Retirement Funds. I am in 30% tax bracket. Can you please suggest. Also for future investments should I continue doing in SIP in Mutual Funds or some new SIP as well ? Pl suggest for any other investment also

    • Dear Raman..what is your expected age of Retirement? Share more details about your existing investments (if any)? Do you have sufficient life insurance & health insurance coverages?

      • Raman says:

        Hi Sreekanth,
        Thanks for the reply

        My expected retirement is 55 -58 yrs. I am investing in PPF for past seven years ( full limit). I have Life insurance ( endowment and market linked ) but no term insurance . Yes, I have health insurance started only two years ago. Invested abt 1L in MFs in the past. Thinking of SIP but not sure if it should be ok. I donot have any pending loan at present.Have some FDs which I am renewing every year. Should I break that and put some where else as after reading your article I find FD is not good for a long term. Also further Can invest 10-15K per month now. What wd be your suggestion?

  • Mehul H Gohel says:

    Hi Sreekanth,

    i just checked your blog and read the queries raised by the people as far as financial planning is concerned.

    i am in 20% IT slab, i want to invest around 40000 rs / month. from which around 25ooo /pm i want to invest for long term (more than 10 years) and 15000 / pm for the short term (6 -12 month).

    i have money back life insurance policy for which premium is around 37000) and other conventional policy for which premium is 18000 rs, health insurance premium is around 15000 rs. / per year.

    i was thinking to go for monthly FD / RD for the said amount but after reading your article and comments, i think i have to change my decision.

    please suggest to get the best return on mentioned fund

  • Balu says:

    Hi Sreekanth,

    I dont have lumpsum amount to invest. I can be able to invest Rs. 5000/month and also want tax exemption for the amount invested. Please let me know which option i have to go for.

  • Ankit says:

    Thanks Sreekanth! I’m in 30% bracket.

    Can you please advise which is good between FD and short term debt funds considering the overall post tax return and time period (6 months)?

    If I should go for debt funds, it would be helpful if you can suggest some good funds in the cateogry?

  • Praveen says:

    Hi Sreekanth,

    I have opened RD for 3.5 years and monthly i will be paying 3000/-. Is this investment safe whether TDS is calculated on RD as well?

    Project Leader

  • shankha says:

    I just get one maturity amount of FD Rs 6 L
    My age is 34.

    I have to give some portion of this money (50%) to my school/ charitable home etc after 5 to 6 yeras.
    Where should I invest and how I invest so that after 5 years I can expect a good Tax free return.

  • shankha says:

    I just get one maturity amount of FD Rs 6 L. This amount is my Mother she is now 55.

    Should I invest this to again in FD or have some suggested better oppertunity for my Mother of Rs 6 L.

  • Ankit says:

    Hi Sreekanth,

    I have to invest a lumpsum amount of about 2 lakhs which I need to invest for short term ( 6 months or more).

    Shall I go for debt mutual funds as compared to FDs ? If so, can you please suggest some fund(s) I could consider ? Also the market is low now so lump sum investent might make sense. Thanks!

    • Dear Ankit,
      If you need money in 6 months, do not invest in equity markets or equity mutual funds (even if the market is performing well).
      Invest in short term fixed deposit or short term debt mutual funds. Kindly understand the tax implications too for short-term investments (What is your income tax bracket?)

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