Recently India’s biggest bank State Bank of India – SBI has cut the interest on saving deposits from 4% to 3.5% and other bank followed. This is the first time since last more than five years that interest rates have come below 4%. SBI has taken this decision due to two major reason, low inflation, and high-interest rate. This decision is a shocking news to lots of investors. There are many retire and pensioner people in the country who lives on the interest earned on their corpus.
This decision by SBI is the proof that not only mutual funds, even the safest of the deposits carry market risk. We know that price of stocks, gold, silver, bonds, real estate, commodity fluctuates on a daily basis. So investment done in these avenues are also fluctuating on daily basis. The risk in mutual funds are risk derive from the actual risk which is inherent in an asset they buy in a portfolio.
Below is the proof that your fixed deposits also carry market risk.
In India, Saving bank, fixed deposits, recurring deposits also carry market risk. They are insured for up to Rs. 1 lakh only. This means that if the bank fails to pay there is a guarantee that you will get your money back up to Rs. 1 lakh only, balance amount you have to forget forever. So if you think that all your money lying in your bank is safe then go and rob your bank and next day check what will you get from the bank. It means all your saving bank account, fixed deposits, recurring account above Rs. 1 lakh carries market risk.
Secondly, with the decreasing interest rates, your money will also lose its purchasing power. This is known as inflation. Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of the currency is falling. You will need more money to buy things as against your limited corpus. As inflation rises every rupee you spend you get a lesser amount of goods and services. The value of rupee is decreasing due to inflation. When inflation increases there is a decline in purchasing power of money.
As per the Indian income tax rule, interest earned on deposits for greater than 10 thousand is taxable as per your tax slab. This means if you are earning an interest of Rs. 1 lakh a year and you are in 30% tax bracket, Rs. 27000 is tax payable on your earnings from interest. The net off earning will decrease and if the inflation is high during that period, you may get negative returns as well. So there is a risk of losing your money and hence it carries market risk.
Looking at the above points it is highly recommended not to put your hard earn money into fixed deposits