I have noticed that many people including some of my friends do not think much about the money they have in their bank account. A large amount whenever remains parked (I call it idle) in savings account, gets you the standard savings interest rate i.e. 3.5-4% p.a. in India. You are free to withdraw that money. But on the other way if you keep the same amount in fixed deposits (FD's), you earn 8-10%. Generally people avoid putting money into FD's because of several reasons. Few of them are hassles of creating/breaking/en-cashing FD's, ignorance, laziness etc.
In this article, I am explaining how you can use these FDs for earning better interest rates, at the same time with the flexibility to withdraw.
Interest rates in India are quite high when you compare it with the foreign countries. But at the same time cost of living is also going up compare to other countries. So actually, we do not get the advantage of high interest rates. It becomes necessary for us to survive our savings in terms of wealth. Every year our wealth changes due to Inflation (The increase in cost of living) and Interest rate of our savings; Because in India, the inflation is around 8-10% and the interest rate we get is 4%, so our actual wealth out of savings declines by 4-6% every year. In simple words, the purchasing power of the money (currency) reduces. Consider this example; in 2008 year, with 10,000 INR if you could have purchased 10 jeans than this year with the same amount you will be able to purchase only 9 jeans. So apparently you lose money equivalent to one jean in one year.
So, how do you avoid inflation getting onto your head? The simple answer is, do not invest into savings account. Invest in fixed deposits. The bank gives higher rate of interest on fixed deposits compare to normal savings account. It's around 9-10.5% p.a. But in that, how do you get freedom to withdraw your money, any time, anywhere you want? Yes, there is a solution available for that. You can have both high interest rate of FD's and ATM facility of savings account. The instrument providing that is called as Over Draft (OD's). It's been favourite of businessmen, but rarely used from investment perspective.
So the approach that I use is, create fixed deposits for small durations like one - two years. And pledge those fixed deposits for an OD in your savings account. Every bank gives a reasonable high rate of interest on fixed deposits and at the same time charges 2-3% over and above interest on OD's. They also give 80-95% limits on pledged securities (FD) which gets majority of your FD amount free for withdrawal. So the interest you have to pay to the bank for using the OD reduces to 2-3% if you subtract FD interest you get from bank. At the end of the year, if you have used the OD fully for the entire year, then also you earn interest of 7- 8%. Isn't it interesting to earn more interest??
NB: Inflation affects everyone, so investments in fixed deposits are insufficient to beat inflation rate. It's certainly not the best way to put your money, but at least better than savings bank account. The data and calculations shown are my personal view. The idea is derived from books by Robert Kiyosaki. Comments welcome. Thank you.
Click to get details: Fixed Deposit, Overdraft, Inflation, Purchasing power, Fixed Deposit rates in Indian banks
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