Bank FDs are financial weapons of wealth destruction that contribute to a slow and steady decline in wealth while upholding the reputation of being one of the “safest” asset classes. Unfortunately, most individuals and corporate continue to invest in deposits with a belief that deposits keep their hard-earned money secured.
As on March 2021, Banks in India held upwards of INR 150 trillion (150 lakh crore) in deposits and this figure is steadily growing.
Let’s understand how deposits are destroying wealth over a longer period of time. Historically, in the long run interest rates on deposits have been around 6-7% while the returns from Indian equity markets have been 14-15%. If this INR 150 trillion remains invested in deposits for next 20 years, it will reach a size of INR 580 trillion at 7% rate of annual growth. If this corpus gets invested in equities and were grow at 12% CAGR, the end number would be a whopping INR 1500 trillion! This implies a potential loss of INR 866 trillion of investors’ wealth in 2 decades if things do not change. This is the cost of safety! Just to get intuition about INR 850 trillion - this is nearly three times the current value of all listed companies of India.
As people grow older, they get comfortable with keeping their life savings in deposits. Investing retirement fund in a non-growing asset class, such as Bank Deposits, an investor may feel secured given the non-volatile nature of deposits, but this sets him up for a rude shock in years to come. At a 7% inflation rate the cost of living will double in 10 years and quadruple in 20 years. It is critical to grow wealth at least to beat inflation and cover additional old-age related expenses. As people get older, they need more money to cover medical expenses and nursing support, and in absence of good portfolio growth, they are left with no other choice but to cut their lifestyle expenses and lower their standards of living.
Wealth creation is a choice and time is of the essence. If you don’t act, the wealth will erode with time – the longer the period more the erosion; if you act, time can help to compound your wealth – the longer the period higher the compounding and the growth.
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