FD vs Inflation Calculations: The charm of fixed return investments is everlasting. However linked-return investment options may hit the market, many investors love the comparatively much safer environs of guaranteed returns. But in a scenario where inflation is reducing your purchasing power and FD rates are declining, what will be the real value of your FD investments?

At a 7 per cent interest rate and a 6 per cent inflation rate, what will be the real value of your Rs 1 lakh-20 lakh investment in a 5-year FD. See our estimates to know- 

Investment return-inflation relation  

When we invest in market- or non-market-linked investment options, we have some expectation of return.

In fixed return investment options, we know the maturity amount at the time of investing our money.

In market-linked investments, the return can be highly negative to highly positive.

But whatever return we may get from our investment, inflation affects its value.

Amid such a backdrop, the real rate of return, or inflation-adjusted return, becomes the return that we as investors get. 

Real rate of return (RRR) formula  

Real rate of return (RRR) = [(1+nominal rate)]/[(1+inflation rate)]-1

If the nominal rate is 7 per cent and the inflation rate is 6 per cent, then the real rate of return will be 0.94%.

The chart below will explain how investment returns in the 5-25% range will look, actually, in a 6 per cent inflation rate scenario.

FD effective rate

It is important to know that FDs in India are compounded quarterly.

So, if the nominal rate of an FD is 7 per cent, its effective rate (the rate that investors will get) will be 7.186 per cent thanks to 4 compoundings a year.

So, for our story, we will take 7.19 per cent as the effective rate of FD return.

Maturity on Rs 1 lakh-20 lakh investment in 5-year, 7% FD rate, 6% inflation

If you invest Rs 1 lakh-20 lakh in a fixed deposit scheme where your investment return is 7 per cent, here are the non-inflation-adjusted and inflation-adjusted returns you will get in maturity after 5 years.

Conclusion

The table presents a clear picture of the real value of your investments in a 5-year FD. We are not calculating the income tax here. FDs are taxed at slab rates. After paying tax, the value of your investment can be far lower than what you may think. It doesn’t mean that one should leave investing for the fear of inflation. But one should invest according to their financial goals and keep increasing their investments as and when their income rises.

(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)