We are creatures of habit. This applies to our investment habits as well. I see many investors investing in Bank Fixed Deposits out of sheer habit. Once having adopted the habit, they tend to follow it religiously. They maintain long lists of FDs, religiously maintained on excel.
Many investors I counsel away from investing in Fixed Deposits into higher yielding investment options such as Equity Mutual Funds, REITs, INVITs and other market-linked products. Often, their argument against such investments is – “markets are too high at present”. “I will invest when they are lower”. They then resume investing in FDs.
FDs by their nature tend to be tenure-based, meaning they tie up the money for a fixed period of time. So let’s say, an investor invests in a 2-year FD or a 3-year FD, he commits to lending the money to the Bank/ NBFC/ Corporate for that time period. Banks/ NBFCs/ Corporates charge a penal rate of interest in case, the investor wants to opt for premature withdrawal. This deters investors from doing so. This entire set of circumstances causes Investors to never be able to wean themselves away from FDs. This is because once an investor has got locked-in to a FD, he/ she will be extremely fortunate if markets are down during the period when the FD matures. This starts a self-perpetuating cycle of investors opting for FDs and then renewing them from time to time. This habit loop is very detrimental for returns on Investors’ portfolios.