Wednesday, 27 February 2008

Are Fixed Deposits risk-free instruments?

I have been busy meeting lawyers, consultants, advisers and investors regarding my Fund for the last one week. I spoke to 2 individuals who always put their money into fixed deposits and the most often reason cited is that fixed deposits are 'risk-free'. Frankly are FDs really risk free? To me, putting money solely in FDs is actually very high-risk. I have not put money in FDs for a long time and in fact, i always offer to pay the FD rate to anyone who wants to 'loan' me their money.

If you are someone who aspires to be financially free, then putting $ into FDs will not lead you to financial freedom. With inflation at 6% last year and FD rate at 2% (figuratively speaking), you are actually losing 4% per annum in terms of your purchasing power. To me, putting money in FD is a high risk strategy if the inflation rate is higher than the FD rate.

In my personal opinion, FDs should only be part of your asset allocation. One should invest a portfolio of different asset classes like properties, commodities, stocks, bonds, cash etc but having said that, one must know the risk-return profile for each asset class and the investor must know his or her own risk appetite and profile so that the most appropriate portfolio can be structured.

Take care and happy investing.

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