Bank FD giving negative return; so, where should you park your money?

• Follow

It’s a double whammy for small investors. The high inflation and low interest rate on fixed deposits are nibbling away at their savings. This is because, currently, bank deposits are giving the return as low as 5.5% while the inflation rate is as high as 7%. The real rate of return on FDs work out to around 1.4 per cent in negative.

The negative differential has left small investors wondering whether to save or spend their money. In such a scenario the question also arises where to park your money? Here is how you can make the most of low interest regime:

Home Loan

If you want to buy a house but the high interest rate was a deterrent, then this is a good time to take the plunge. The good news is you might not have to squeeze your budget hard, as real estate prices have also seen a sharp correction due to Covid-19 led slowdown in the economy.

Debt Funds

When fixed deposits are giving low return, you can consider investing in short term debt funds. Experts, however, say that the return next year may not be as high as last year. During the last year short term debt funds gave the return of around 10%.

Lovaii Navlakhi, founder and CEO of International Money Matters, a Bangalore-based financial planning firm, says “As right now growth is the focus, debt funds might not give as high return as the last year.” He adds, “For short term FD rates are below the inflation rate. But interest rate and inflation differential will not be there for a long period .”

Systematic Withdrawals

If you are a senior citizen and want some regular income then consider starting a Systematic Withdrawal Plan (SWP). They are very tax efficient as you pay tax only on gain and not on the whole amount withdrawn.

Consider this:  Suppose you invest Rs10 lakh in a 5% FD.  Assuming you fall in the highest tax bracket, you would need to pay a tax of about Rs15,000 on the interest amount of Rs 50,000. Now, if instead of FD you start an SWP, then your tax bill would get reduced, considerably. Assuming returns are same and you withdraw Rs 50,000 every year from the debt fund, you would have to pay taxes on capital gain part only which would be Rs2,500 (Rs50000-52,500). The tax amount would work out to only Rs 750.

Fixed income lovers can also consider investing in LIC’s Pradhan Mantri Vaya Vandana Yojana which provides an immediate pension for senior citizens of 60 years and above. The interest rates are reviewed by the government at the beginning of every year. Currently, the rate is 7.40 per cent per annum payable monthly.

Goal based Investing

Experts say always invest keeping your goals in mind. Priya Sunder, director at PeakAlpha Investments says, “Before deciding where to invest , you need to match the tenure of the goal with the tenure of the investment, You also need to look at the income level and tax bracket and then decide what combination works the best.”