Before getting excited about the returns you would get by investing in a FD or any other bond, factor in aspects like inflation and post tax returns.
The Real Return:
Most often, it is observed that, people consider only the percentage of returns that they will get after an investment period of 10 years. But little do they realize that the net funds they will have in hand is only half of that double digit they expected. For example, a fixed deposit (FD) offers an 8% rate of return for a one-year deposit and you fall under highest tax bracket, the actual return you get will fall down to 5.3% post-tax. For highest tax bracket, the post-tax returns are even lower—7.25% over 10 years and 7.42% over 15 years. So, do not get swayed by stated returns but see the tax bite to know the real rate of return. This aspect if considered, can save you the choice of purchasing a personal loan or a home loan etc., in future, as it will ensure that you have all the funds required.
Apart from the post-tax return bracket, you should also consider the inflation rate. Your returns will not have any value if the inflation rate is higher than the interest percentage the bank or any financial institution is offering you. For example, say the inflation is 12% while your FD gives you 10%. Though the double-digit return may make you feel happy, you are actually losing about two percentage points of purchasing power.
Liquidity:
It is also equally important for you to categorize your goals into long term and short term goals, depending on which you need to build a strategy for your investments. For instance, if you are looking to invest for a medium- or short-term goal, putting all your funds in Public Provident Fund won’t make any sense. If you are looking to tap into your investments in the short term, investing into a liquid fund makes more sense, instead of investing in an FD.
Cost:
Before scurrying in with your debt and equity products, it is important to learn what is the cost of obtaining such assets. By cost, we do not mean only the cost of purchasing the assets but also cost on premature withdrawals and certain costs that are incurred at each stage for most financial products.
Ease of transaction:
These days, time is considered a very important asset. Before you zero down to you preferred asset class, see if the product can be bought with ease, is there an online option to buy? Does it have minimal paperwork required? etc.
ATM:
Automated teller machines (ATMs) too have made buying and requesting for financial products easy. You can open an FD at an ATM. Some banks even allow you to buy and redeem units of MFs at ATMs.
Agents and financial planners:
Though to buy financial products offered by post offices, you still need to visit local post office, there are agents or brokers who can help you. Also many financial planners help you buy investments and insurance policies without you going through all the paperwork.