Why Fixed deposits and other Fixed interest products cannot create wealth?

This is my first post and would like to keep it as simple as possible. Let us first talk about inflation. Inflation is the increase in the prices of goods / consumables / commodities / services etc., over time. Inflation rate over the years on an average has been around 8.5% p.a. It means that the prices increase at the rate of  8.5% p.a. If the price of item X is Rs. 100 today, after 1 year same item would cost you Rs. 108.5. Now, coming to Fixed deposits, they offer you interest rate of ~ 8.5%. So, Rs. 100 invested in Fixed deposit would give you Rs. 108.5 after an year. Due to inflation, the value of item X has gone up to 108.5. So with the money invested through Fixed deposit, you can barely buy the same item X after an year. It means you can barely maintain your standard of living and worse if inflation rate > Interest rate, which will deteriorate your standard of living. Your REAL RETURN OR INFLATION ADJUSTED RETURN (which is Interest rate-Inflation rate) from Fixed deposit is ‘ZERO’. So, can Fixed deposits create wealth?? You always have to invest in financial products which will give returns much higher than Inflation rate. I will share info. about such products in my subsequent posts.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s