Is it the Break-up Time for India's Love Affair with Fixed Deposits?
The limited disposable income and financial liabilities hinder the Indian middle class, the predominant group of the Indian population, from taking any financial risks. Thus, a combination of a limited disposable income and a risk-averse attitude led to our decades-long love affair with a financial asset that offers high security on capital but very little returns: fixed deposits.
In simpler terms, a fixed deposit is a safer investment that pays you a minimal rate of interest for a fixed period. The rate of interest or return vary in accordance with the fixed term or the maturity period of the fixed deposit scheme.
In the investment world, with little risks comes meager returns. Keep the higher safety of the capital aside, like every other investment asset, fixed deposits also have some risks associated with them.
Risks Associated with Fixed Deposits
1. Limited Access to Your Money
A fixed deposit offers limited access to your money that is locked up for the maturity period of your fixed deposit’s tenure. The maturity period may range from months or even years. The withdrawal of your deposit prior to the maturity date invites a reduced interest rate or a hefty fine.
2. Lower Returns
Though a fixed deposit offers a higher interest rate than your savings account, the returns it offers are very low compared to other investment assets available in the market. Today, a maximum of 6-7% annual interest rate is offered by a few Indian banks for deposits below 2 crores.
3. A Weak Shield Against Inflation
While fixed deposits offer greater protection for your capital but with lower returns, it fails to shield your capital against another impending risk: inflation. With the current inflation rate in India standing at 6.2%, a fixed deposit scheme that offers a 6% interest is like parking your hard-earned money with no investment return at all!
4. A Boring Investment Venture
While today’s market offers a wide array of exotic investment assets with greater returns, fixed deposits stand as a safer yet boring investment that has very little investment return to offer. If you look out for active participation in the investment world, a fixed deposit is probably not a suitable investment asset for you.
Today’s investment arena offers a great number of investment assets that offer greater returns. Let’s take a look at some of them.
Sounds risky, isn’t it?
'Risk comes from not knowing what you’re doing,' said Warren Buffet, an ace investor, and the ninth richest man in the world. When it comes to risk, it is the lack of knowledge that puts us in trouble.
Out of all the investment assets mentioned above, lease investment stands out as an investment opportunity that requires little knowledge, sheer commonsense, and possesses lower risk that also offers a steady cash flow.
What is Lease Investment?
In layman’s terms, a lease investment is a real estate investment that earns commercial rent as a steady cash flow to the investor. Unlike other rental investments, lease investment offers better returns with greater protection against inflation and taxes. Some of the benefits of lease investment are as follows.
Lower Risk
Real estate investments, in general, are low-risk investments. In lease investment, the lessee pays nearly all the property costs including taxes, insurance, and maintenance turning it into an investment asset with the lowest risk in the real estate arena.
A Longer-Term Steady Cash Flow
Rental income offers a steady flow of revenue to the investor. The lease investment offers the same for a longer term as most of the lease agreements were made for up to a minimum of 20 years.
Tax Benefits
Since the lessee is responsible to pay property taxes, and insurance in addition to the rent, it provides tax benefits to the lessor or the investor. Because of these tax benefits, lease investments are considered conservative, low-risk assets in an investment portfolio.
Stronger Shield Against Inflation
Lease investments also include step-up lease agreements that increase the rent gradually through tenure. It can protect the lessor from inflation, and rising prices in the real estate market.
Several expert investment firms allow investors to co-invest and have partial ownership in real estate assets that earn lease income. It has made lease investments accessible and affordable for the common man. This lower risk, steady revenue-generating investment vehicle provides the investor with more time and money to invest in other profit-making ventures.
