Do you know what are the real returns from fixed deposits? Do you know how is the CPI calculated?
Ever wondered how your fixed deposits are performing? Or do you want to know what and how is the consumer price index calculated? Then you have come to the right place!
If you are a regular reader of these pages you know that I am a strong believer in ‘real returns’. That is, returns that come from increases in wealth and not from changing prices.
My experience tells me that most people investing through the popular fixed deposit schemes are getting good returns.
When you invest in a fixed deposit you expect a real return, that is, nominal interest rate minus inflation. Suppose the bank offers 6%. So, what’s your real return?
Interest rates on deposits have hit an all-time low. If you have invested in bank deposits, you know your returns have got reduced.
FDs continue to yield negative real returns for quite some months now.
What Is Meant by Real Returns?
The real rate of return is the annualized value of the total amount of goods an investor receives for making a fixed investment over time, accounting for inflation.
A real rate of return does not account for the effects of taxes.
In spite of being a very important concept, it’s poorly understood.
The investment community often confuses the concept of real returns with that of nominal returns.
Yet I believe that anyone who understands what real returns really are will know how to invest successfully and profitably in the long term, without suffering major setbacks from which they do not recover for a very long time–if ever.
The returns your bank gives you on your fixed deposit are nominal returns. It does not consider inflation and taxes.
You get your real returns after considering your taxes and inflation. So, the real returns on your deposits are less than the nominal returns.
Rising Inflation and Diminishing Returns
The rate of inflation has crossed 5%. It has hit the depositors hard. Their returns on investments and savings have diminished. However, inflation has eased out a bit in the latter half of 2020.
As a result, depositors have heaved a sigh of relief.
The government has currently revoked its decision of increasing interest rates. However, you have to keep your fingers crossed for future monetary policies.
Interest Rates on Fixed Deposits
Well, fixed deposit rates in India range from around 5% to 8% per annum. SBI currently offers interest rates of around 5%.
Senior citizens can get higher rates. However, considering the inflation and taxes, the real returns are in the red.
Fixed deposit rates are falling all across the country. Interest rates on fixed deposits have fallen by almost 1% in just the last 6 months, despite the fact that bank deposit rates were raised a few times in the meantime.
Banks invest your money at paltry interest rates because most of their other businesses lose money.
Returns Expected to Improve in Future
Throughout 2020, banks had aimed to maintain the liquidity of money. As a result, lending rates were kept low.
Moreover, since borrowing was less, banks needed fewer funds. That is why they kept the fixed deposit rates lower.
The situation this time is expected to improve. Depositors can expect their real returns to increase.
The RBI has predicted an economic growth rate of 10.5%. It will also have an impact on the fixed deposit interest rates.
Credit outgo will remain steady in the coming months as businesses will continue borrowing. That would increase the demand for funds by the banks.
Hence, they might lure depositors with higher interest rates. Some banks and financial institutions have already started increasing their rates. Others are expected to follow suit.
What Should Depositors Do?
The Reserve Bank has set its macroeconomic targets. It aims to reduce inflation by 2021-22. So, the interest rates on deposit schemes are expected to shoot up in the latter half of the year.
Now, what should you do to maximize your gains? You can continue opting for short-term deposits. That would give you the flexibility to shift to schemes with higher returns when the interest rate rises.
Final Word
PNB Housing offers one of the highest rates on fixed deposits. You can invest in long-term deposits to earn better returns. Moreover, your hard-earned money will stay safe from all the market risks.
So, start investing now and grow your money.