January 30 , 2013
Myth 1: Any fixed deposit is safe
Fact: Only Nationalized Bank fixed deposits are safe. Slightly less safe are deposits in cooperative banks. Corporate fixed deposits can be quite unsafe at times - it really depends on the company you are investing in. Many companies tend to advertise their deposits and lure you with higher interest rates, so beware!
In general, while investing in fixed deposits, we advise you to stay with Nationalised Banks. You would rather not chase the extra percentage point of return and risk losing your capital in the process.
Myth 2: I do not involve myself in stocks, markets and finances. So fixed deposits are best for me
Fact: While Bank fixed deposits are undoubtedly safe, their returns are poor. In fact, over a long period of time, they tend to return lower than inflation - so your purchasing power actually reduces if your money is stored in fixed deposits over long periods of time. Fixed deposits are primarily useful if you need the money within the next three years or so.
Over the long term, there is no alternative to equity if you want to stay ahead of inflation. If you are not interested or not involved in finance, there are still products to suit you - such as index funds. We would suggest spending a few minutes learning about them, rather than shutting off equity altogether from your portfolio.
Myth 3: This new deposit scheme my Bank offers has no TDS. I should invest in that
Fact: TDS or no TDS, your tax liability does not depend on the product. It only depends on your income for the year. All interest bearing products (fixed deposits, savings accounts, recurring deposits, etc) are taxed as income in your hands. Having TDS actually simplifies life for you since the Bank pays some tax on your behalf and gives you a certificate. And having no TDS is not really a bonus, since you need to pay tax as per your slab anyway, on the interest you received from this product.
'No TDS' is only a selling gimmick employed by some unscrupulous Banks to confuse you.
Myth 4: The yield calculation given in the brochure is correct
Fact: The interest or yield calculation in most brochures is inaccurate or misleading. They often use the simple interest, which gives a higher number, to calculate yield. The correct way to calculate yield is the annual compounding method. If you are given a simple interest of x percent for n years, the formula to calculate the correct yield is
So if you have a deposit advertising a 12.21% yield in five years, the correct yield is:
5(1+12.21%)1/5-5 = 11.65%