Fixed Deposits | Image:Freepik
Inflation’s impact on FD: Are you still parking your money in Fixed deposits? Inflation poses a major threat to FDs, potentially eroding up to 60 per cent of returns over a 20-year period, say experts. While FDs offer stability and guaranteed returns, they are not immune to the effects of inflation, which steadily diminishes the purchasing power of money over time. This poses a particular challenge for senior citizens, who often rely on FDs for a steady income post-retirement.
Perceived safety of FDs
Despite the perceived safety of FDs, their returns can be significantly undercut by inflation. For instance, if someone invests Rs 1 crore in an FD at a six per cent annual interest rate, after factoring in an annual inflation rate of five per cent, the real value of the investment diminishes considerably over time. By the 20th year, inflation could eat away nearly Rs 2 crore from the FD returns, highlighting the adverse impact of inflation on long-term savings.
Diversify the portfolio
Senior citizens, in particular, are vulnerable to the effects of inflation due to their reliance on fixed income sources and increasing healthcare costs. To mitigate this risk, experts advise seniors to diversify their investment portfolio beyond FDs. “This could include investing in assets like mutual funds, stocks, real estate investment trusts (REITs), gold, and bonds, which historically offer better returns compared to FDs over the long term,” said Arpit Suri, CA and personal finance expert.
Say no to erosion of value
Additionally, seniors can explore options like systematic withdrawal plans (SWPs) in mutual funds, which provide a steady income stream while potentially offering better post-tax returns than FDs. Investing in inflation-protected securities such as inflation-indexed bonds can also help hedge against the eroding value of money.
“It’s essential for seniors to stay informed about economic conditions and regularly review their investment portfolio with the assistance of experienced financial experts. By adopting a diversified approach and understanding the impact of inflation on their savings, seniors can better safeguard their financial stability in retirement,” Suri further said.
