The fixed income trap

A couple of years ago, I wrote about how India remains fundamentally a fixed-income country. I then showed that even PPF, the best fixed-income option available, delivered only about Rs 60 lakh over 44 years of systematic investment, compared to Rs 2.3 crore from an equivalent investment in the Sensex. That's nearly four times the wealth, the difference between being comfortable and being genuinely wealthy. Yet here we are, still a nation of fixed deposit holders.

The question that has been nagging at me lately is this: why does this persist? It's not as if this information is hidden. Mutual fund advertisements are everywhere. Financial literacy campaigns run constantly. The maths is straightforward enough. And still, the behaviour doesn't change meaningfully at scale.

Part of the answer lies in understanding who benefits from India's fixation on fixed income. Follow the money, as they say. When you deposit money in a bank, the bank doesn't just keep it in a vault. A substantial portion is directed to the government through statutory requirements such as SLR and CRR. Banks are required to maintain a certain percentage of their deposits in government securities and cash reserves with the RBI. This is, in effect, a captive lending mechanism. The government has access to vast pools of cheap capital without having to compete in the open market.

Think about it from the government's perspective. Why would any government, of any political persuasion, actively push its citizens away from bank deposits and towards the stock market? The institutional incentive runs entirely in the opposite direction. Every rupee that moves from a bank account to an equity mutual fund is one less rupee available for this comfortable arrangement.

PPF and other small savings schemes work similarly, except that the government pays slightly more for this money. Post office deposits, National Savings Certificates, and Sukanya Samriddhi accounts are mechanisms for the government to borrow directly from citizens. The rates are modestly attractive, the sovereign guarantee is comforting, and the tax benefits are real. But the fundamental transaction remains the same: you lend to the government at rates that barely keep pace with inflation.

The cultural dimension is equally powerful. For generations, the Indian middle class has been raised with a deeply ingrained suspicion of risk. Fixed returns, however modest, feel safer than volatile returns, however superior. Parents advise children to keep money in FDs. Bank managers are trusted figures. The stock market is seen as something for speculators and the very wealthy. This isn't irrational, exactly. Given our history, the instinct to protect capital rather than grow it makes a certain kind of sense.

But here's the tragedy. This combination of institutional incentives and cultural conditioning creates a system in which the average saver is quietly impoverished over the course of decades. Inflation steadily erodes the purchasing power of fixed income returns. After tax, after inflation, that bank FD is essentially just marking time. The saver feels safe but is actually falling behind. Meanwhile, the institutions that manage this money, the banks, the government, and the insurance companies, pushing traditional policies, all do quite well.

Will the Indian saver ever escape this trap? The recent growth of SIPs suggests some movement, particularly among younger investors. But the vast bulk of Indian savings still sits in fixed-income instruments of one kind or another. The structural incentives haven't changed. The government still needs cheap capital. Banks still need stable deposits. And the cultural preference for safety over growth remains deeply rooted.

Perhaps escape is too strong a word. What we might hope for instead is a gradual awakening, a slow recognition that the real risk isn't volatility but inadequacy. That the guaranteed low return is not safety but a different kind of danger, one that reveals itself only decades later when retirement arrives, and the numbers don't add up. The system won't change to help you. You'll have to change despite it.

Also read: Zero or hundred?