Bank FDs…. compounding effect…whether good to invest money or not

POSTED BY avsar.thakker ON March 15, 2012 4:08 pm COMMENTS (9)

Dear Manish & all 

I came to know about effective yield (through some site) % if we invest in Bank FDs.

E.g. the effective yield comes to be 17+% p.a. if one invests the money in FD for 10 years @ 10.25 (Senior Citizen) which is really very good return comparing to long term stock market…bcos generally in stock markets also on an average in long term one can expect about 12 to 14% p.a…. provided the FD is selected for maturity and quarterly compounding of interest and the same is reinvested.

Manishji, kindly give comments on this subject…and if we get such a handsome return of about 17.51% then why should we go for Mutual Funds or Stocks ?






9 replies on this article “Bank FDs…. compounding effect…whether good to invest money or not”

  1. says:

    Thanks everybody a ton 🙂

  2. I thought i responded to this thread. Anyways i do it again.

    If i was senior citizen then i would have gone for 10.25% interest for 10 years.
    Couple of resons for this.

    1. As there is no other source of income, i will be in lower tax bracket.
    2. After 60, i dont think i would have the strength to tolerate the sign wave of stock market.

    Note : Lakshmi Vilas bank is offering 10.75% for senior citizen. Another bank offering attractive interest rate is CSB. People in lower tax brackets, can utilize this opportunity

  3. Dear Avsar, for Sr. citizen there are very few instruments available in post retirement life to fall back upon for tax saving purpose. Bank FDs are one of the easiest instrument to invest in. So a Sr. citizen may invest in Tax saving bank FDs to cover his/her Tax saving limit.



  4. says:

    Dear Justgrowmymoney, Ramesh, Ashal, Bharat ….

    First of all thanks very much for providing your feedbacks….

    Further I would like to say that

    (a) Tax benefit will only come if I come in 30% tax bracket
    (b) As you say –> Bank FDs are extremely inefficient from a tax perspective… but its only applicable when the income from FD reaches above the slab of senior citizen of income tax….right ?

    Kindly comment


  5. Dear Avsar, please read my reply in addition to what dear Justgrowmymoney & dear Ramesh had already told. For current year PPF interest rate is 8.6% & max. investment limit is 1L Rs. under section 80C. So after completing 1Y, the balance in your PPF account ‘ll be 1.086L Rs.

    Now for the person in 30.9% Tax slab – the effective investment after benefit of tax saving was 69100 Rs.

    So this person is earning 8600 Rs. as interest from investment of 69100 Rs. which is 12.45% return.

    Now please do remember for this person, the 8600 Rs. interest earned is tax free. So if the same person is investing in a taxable instrument to earn the final figure of 8600 Rs. post tax on the investment of 69100 Rs., the rate of interest ‘ll be 18.01%

    Now do tell me that 10.25% FD is better or this simple PPF is better for this imaginative calculation?



  6. Sunil,

    If i was senior citizen i would have blindly invested my money @ 10.25% for 10 years. Here are the reasons for doing so.

    1.As a senior citizen tax brackets are friendly. upto 2.5 lakh Nill Tax and only 10% upto 5 lakh.
    With no salary there a many who end up being in 10% bracket.

    2. Safety of money is very important for senior citizen.

    Look out for banks that are offering highest rate of interest . Currently Lakshmi vilas bank and CSB banks are offering attractive rate of interest.

  7. Ramesh says:

    Inventive calculations create a fog of apparent 17% return (instead of 10%), with lot of assumptions. If you will apply the same assumptions on ELSS, then you will find that you get even better returns.

  8. Avsar – The around 17% yield is true but comes with a catch. Here is how.

    Long term FDs (5 Yrs+) can be treated as investments under 80c. So if one invests 1 lac today and assuming they are in the 30% tax bracket the true outgo is only 70,000 while at 10% the annual interest earned will be 10,000. Earnings of 10k on 70k is a 14.28% return for year 1 and gets eventually to the 17% mark over a longer duration as interest also earns interest.

    Points to note:
    1) There are better avenues to park 80c investments like in PPF/ELSS. If you already do this (and also consider EPF for slaried) then the tax savings from the FD is zero which will automatically pull the yield to the 10% mark.
    2) Bank FDs are extremely inefficient from a tax perspective. So your, say, 10.25% yield will fall by 30% directly which is 7.17%.

    There goes the 17% story for a toss ….

  9. bharat shah says:

    yield means average annual % return , and not compounded mentioned for mf or equity share. when a mf gave 12% compound interest for ten years . you money multiplied @3.1058 times i.e yielding @21.058% per year. normally wisely selected equity share or equity funds would you give better return than bank fd on long run , but the risk is always associated.

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