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Why ‘Playing Safe’ With Your Investment Strategy Is Actually Risky

By Finserv MARKETS - Aug 29,2019
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Cons of safe investments

Introduction:

If you ask people around you to choose an investment instrument, your peers and parents alike refer to fixed deposits in the very first instance. If you prod them, they’d all explain how fixed deposits are a safe investment option, how you stand to lose no money, and yet earn a higher interest on the funds that were otherwise lying idle in your bank account. But is this fixation with ‘safe’ investments really fruitful?

Warren Buffett once remarked, “Price is what you pay. Value is what you get.” If we look at the value that these fixed deposit investments bring us, it is not a very convincing investment strategy to be honest.

In defense of playing safe

To be fair, investing conservatively in financial instruments like fixed deposits makes a lot of sense on the face of it. FDs have always been looked at as the ‘park it and leave it’ option for the traditional Indian investors who want to earn a return on their surplus cash without taking on any substantial risk. The safety and predictability of FDs is even more valuable in tumultuous times of political instability, elections, policy changes, when the clouds of uncertainty and volatility loom over the market, which is the alternative investment opportunity.

Even so, the preference for bank fixed deposits is on the wane, with many customers choosing to hold their money in savings bank accounts for consumption if they are keen on high liquidity. There’s no denying that FDs have always been a ‘certain’ choice. So what’s the catch?

Inflation outstrips the benefits from safe returns

Some may be tempted to either stash their money in a bank account or under a mattress, or go a few steps beyond to get an FD, considering these to be safe options. However, this investment strategy is short-sighted.

What you earn from an investment in the long run has to compete with the inflation rate prevalent in the economy, and it not surpass then at least be commensurate with it. So while you rejoice that the principal amount you have in fixed deposits is safe, the right way to look at it is as if it is ‘stuck’. The purchasing power of the principal amount is falling in value due to inflation. Let’s put some numbers into the argument.

The average inflation rate in India for 2012-2014 was 9.76%. As against this, the rate of interest provided by most fixed deposits is around 8% before tax. The returns from fixed deposits are additionally taxable, and this means you are effectively losing money every year you invest your money in a FD.

While we are talking about taxes, it is worth mentioning that for equity mutual funds, long-term returns are taxed at 10% for a holding period of more than 1 year, on gains more than Rs1 lakh. In contrast, interest on the returns of fixed deposits is taxable at your current tax slab. The higher your income, the lower your effective FD return.

The adrenaline rush of the market

Having established that fixed deposits aren’t as safe in the long-run as you think, the next question looms around whether the investment should then be routed to the stock market? Investing in stocks can provide larger returns, enough for you to overcome the impact of inflation. Historically, stocks have provided higher returns—on average—than other asset classes. These could be potent wealth creation investments to help you fund the bigger events like – your retirement, your child’s education etc.

The best of both worlds

Let’s steer your attention to ULIP Plans, a hybrid instrument that offers you the dual benefit of a life insurance cover and a potential to get maximum benefits through investment in a range of equity and debt instruments.

One might argue about how fixed deposits still serve the purpose for a short-term, and how staying invested in the markets directly in the long run can reap the benefits. Unit linked insurance plans appease both the temptations: Income from fixed deposits is taxed at the marginal rate and LTCG from debt funds are taxed at 20% after indexation. ULIPs emerge victorious over all other options due to the tax-free nature of the premium, returns and maturity. In fact, depending up on the goal of your investment, you can go for, say, the Bajaj Allianz Life Long Life Goal available online at Finserv MARKETS that provides a Retired Life Income.

Conclusion:

As a prudent investor, it is justified to be wary of the fluctuation of the market, and to be aware that the stock market comes with significant downside risks. By putting your money into this asset class, there is always the ugly possibility of losing your principal amount. However, now you also know that investing in the equity markets helps you outrun wealth-eroding effects of inflation. Thus, the safest option is sometimes the riskiest of them all!

Also read in detail about the ULIP tax benefits you can avail with investment plans at Finserv MARKETS.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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