Welcome to the first edition of our weekly column ‘Invest Smart’. This column is all about helping you make better decisions with your money. Each week, we’ll take up one simple idea, tool or strategy that can help you grow your savings, earn steady income or plan for the long term. The aim is to keep things practical and useful so that even small steps can lead to smarter investing over time.
Most of you renew your fixed deposits (FDs) every year without much thought or calculation. A message from the bank arrives, and the money gets locked in once again. It feels like the right thing to do as traditionally FDs have been reliable and simple and offer a sense of certainty.
But then the question comes – is repeating the same decision every year actually the right choice for you?
You see a return of 6.5% (around 7% for senior citizens) and assume your money is growing. But once you factor in taxes and inflation, the picture begins to change.
In 2026, the question is not whether FDs, or term deposits as they are often called, are good or bad. The question is whether you are choosing them with full understanding, or simply out of habit.
Interest rates have dropped, but what happens next matters more
Over the past year, the interest rate landscape has shifted meaningfully. In 2025, the RBI cut the repo rate four times—bringing it down from 6.5% to 5.25%. This transmission has already played out in bank deposit rates.
FD rates at major banks are now in the 6.4%–6.6% range, down from the 7% and above levels seen not too long ago.
What happens next matters even more. Market signals suggest that another 25–50 basis points of rate cuts could follow in 2026, which means FD rates may remain under pressure.
The takeaway is simple: if you are investing in FDs today, you need to do so with the understanding that current rates may not hold.
This is why many investors are choosing to lock in rates at present levels. But whether you should do that depends on your time horizon and what this money is meant for.
FDs Vs. other alternatives: Which will you choose?
The current investment environment is not an easy one to navigate. FD rates are near multi-year lows, and markets continue to remain volatile. That leaves you with a simple but uncomfortable question: do you prioritise safety, or aim for better returns?
FDs give you stability and predictability but at a cost. If you are in the 30% tax bracket and invest in an FD offering 6.5%, your post-tax return drops to roughly 4.5%.
Now compare that with a long-term equity mutual fund. Even with a 11–12% return assumption, your post-tax return can still be around 9–10%, almost double that of an FD.
Debt mutual funds sit somewhere in between. They may not match equity returns, but they can offer slightly better outcomes than FDs, along with liquidity and the potential to benefit from falling interest rates.
The answer, therefore, is not to choose one over the other. It is to use each where it fits—so your money stays safe, but also has the chance to grow.
The biggest drawback of FDs is not visible
Now, let’s get straight to the point – what exactly is the real problem with FDs?
As I said, a headline return of 6.4%–6.6% is really just 4.5% when adjusted for tax. Now compare that with inflation, which typically stays around 5–6%. What this means is simple: your money is not really growing. In real terms, its purchasing power is slowly declining.
Take an example: if you invest Rs 10 lakh in an FD at 6.5%, you earn Rs 65,000 a year. After tax, that comes down to about Rs 45,500.
That is the reality. An investment that feels safe, but does very little to move you forward financially. And there is another layer to this. Every time your FD matures, you have to reinvest at the prevailing rate—which, in a falling rate cycle, is often lower.
This is the real risk with FDs, you don’t see a loss, but you quietly fall behind.
FDs still matter but only for the right reasons
Now, look at the other side of the story. FDs have not lost their relevance. What they offer is something very few investments can match – certainty. From day one, you know exactly how much you will earn and when your money will come back. On the safety front, bank FDs come with the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance of up to Rs 5 lakh, which protects your principal even in extreme scenarios.
If you need money in the next 6–24 months — whether for an emergency fund or a planned expense — FDs remain one of the most reliable options. There is no market risk, no surprises.
At the same time, some small finance banks and NBFCs are offering above 8% FD rates. While these look attractive, they come with relatively higher risk—so it makes sense to limit your exposure rather than commit large sums.
For senior citizens, FDs continue to work well due to higher interest rates and tax benefits under Section 80TTB of the Income-tax Act 1961.
In simple terms, the role of an FD has not changed, it is meant to protect your money, not grow it aggressively.
How much should you allocate to FDs? A simple rule that works
Now to the most important question: how much of your money should actually go into FDs? Start with one simple filter — what is this money meant for?
If you need it within the next 6–12 months, keep it in FDs or liquid funds. At this stage, safety matters more than returns. If your horizon is 2–3 years or more, and you fall in the 20–30% tax bracket, putting all your money into FDs may not be the best move.
Consider allocating a portion to options like Public Provident Fund (PPF) or short-duration debt funds.
Follow a clear thumb rule – limit FDs to 10–20% of your overall portfolio. Use the rest for investments aligned with your goals and time horizon.
And don’t ignore laddering – split your FD across 1, 2, and 3-year tenures. This way, a part of your money matures every year, giving you flexibility to reinvest at better rates and reducing the risk of locking everything at a low rate. In simple terms, FDs should be the foundation of your portfolio, not the whole structure.
Why FDs still matter in 2026
Even with more investment options available and markets offering higher return potential, fixed deposits continue to play an important role in your financial plan, especially if you value stability.
The biggest strength of an FD is capital safety. Your principal is protected, and you know from day one exactly how much you will earn. That certainty becomes valuable, particularly when markets are unpredictable.
FDs also offer guaranteed returns and flexible tenures, allowing you to match your investments with specific goals — whether short-term or medium-term.
Recent changes have also improved liquidity, with partial withdrawal options making FDs slightly more flexible than before. If you are a conservative investor, FDs can still form a reliable base for your portfolio. Just remember, they should support your financial plan, not dominate it.
Make FDs a strategy, not a habit
In 2026, removing FDs entirely from your portfolio would be unwise, but placing them at the centre of it can be just as limiting.
You need to recognise a simple truth: FDs offer security, but they do not create growth. If a large part of your money is parked in FDs, you are not losing because markets have fallen—you are losing because your money is not moving ahead.
It is time to shift from default behaviour to deliberate decisions. Renewing an FD should not be a routine action and it should be a conscious choice every single time.
Use FDs where they work best – for emergencies, short-term needs, and stability. But for long-term wealth creation, they cannot be your primary engine.
Because the biggest risk today is not market volatility, it is the risk of staying too safe for too long.
Note: FD interest rates mentioned above are indicative averages based on prevailing rates offered by major PSU and private sector banks for 1–3 year tenures. Inflation figures refer to the average inflation rate over the past decade and not the current or latest inflation reading.
Disclaimer:
This column is for informational purposes only and should not be construed as investment advice. The views expressed are personal and based on current market conditions, which are subject to change. Investment decisions should be made based on your individual financial goals, risk appetite, and time horizon. Readers are advised to consult a qualified financial advisor before making any investment decisions.