The Power of Labels

Amar Pandit , CFA , CFP

Think of the word “Fixed Deposit” and what comes to your mind. Do you ever think of a Fixed Deposit as a Loan? I bet “Never”.

In reality, A Fixed Deposit is just a Fancy Label for a Low-Cost Loan that you offer to a Bank. You give a loan to a Bank (without collateral) and earn a Fixed Interest. Now go to the Bank the same day and ask for a Personal Loan or Any Loan. The first thing you will be asked for is collateral. Second, the rates on your Personal Loan will be anywhere from 10-15% per annum (twice of what you get). Third, Documentation from you and your creditworthiness.

The point that I am trying to make here is that Labels are extremely powerful and the word Fixed Deposit is so entrenched in our minds that we do not seem to think of it as DEBT or a Low Cost Loan.

When it comes to investing, inflation and taxes eat up a significant component of your wealth (inflation eats up without you noticing it). Thus, your investments should grow faster than inflation and should be tax efficient. Though Fixed Deposits are neither tax efficient nor do they grow faster than inflation, the popularity comes from the positioning of the product as a safe investment and the power of Labels.

The moral of this Nano is to look beyond the labels, to evaluate investments for what they really are and their place in your Financial Plan.