The 20% rule: How much of your net worth should be in low-risk fixed deposits right now?

When determining the appropriate allocation of your total net worth to Fixed Deposits (FDs) – often considered low-return, risk-free assets – it is important to find a balance between capital preservation and growth potential. Fixed deposits offer stability and security during market downturns, serving a different purpose than equity investments.

While mutual funds, ETFs, and stock-linked instruments have gained popularity for their long-term return potential, many investors still value the reliability of low-risk assets like FDs.

The recent stock market volatility has sparked renewed interest in traditional, low-risk investments such as fixed deposits. However, not all financial experts recommend relying solely on risk-free assets like FDs.

CA Nitin Kaushik, in a post on X, shared that for individuals aged 20 to 40, the allocation to Fixed Deposits should not exceed 20% of your total net worth.  He said investors should explore equity, real estate & commodities, depending upon risk taking capacity.

“How much of your total net worth, do you think one should invest in Fixed Deposits i.e, Risk free-low return assets? For me, the number should NOT BE MORE THAN 20% for an age bracket of 20 to 40. The rest of the money is supposed to be invested in Equity, Real Estate & Commodities, depending upon risk taking capacity,” Kaushik in his post. 

Why putting your money in less risky assets might not be beneficial in long term     

1. Limited growth potential

Fixed Deposits, while low-risk and offering guaranteed returns, typically generate interest rates significantly lower than other investment avenues like equities, real estate, and commodities. At an age where you have time to ride out market volatility, putting a large portion of your wealth in FDs may mean missed opportunities for higher returns in more dynamic asset classes.

2. Inflation and returns

One of the key challenges with Fixed Deposits is their vulnerability to inflation. While FD interest rates may appear attractive (typically ranging from 5% to 7.5%), inflation can erode the real value of returns over time. For younger investors, higher returns from equities and real estate can significantly outpace inflation, leading to better long-term wealth accumulation.

3. Liquidity needs and safety net

While a significant portion of wealth should be invested for growth, it’s equally important to maintain a safety net. Fixed Deposits offer liquidity, though with a penalty for premature withdrawal. Having 20% of your wealth in FDs ensures that a portion of your net worth remains accessible and stable, without being overly exposed to market fluctuations.

4. Risk tolerance and diversification

As a young investor, one’s risk-taking capacity is generally higher, and this is the ideal time to capitalize on growth assets like equity, real estate, and commodities, which tend to provide much higher returns over the long term compared to Fixed Deposits.

Equity: Stocks, mutual funds, and ETFs offer the potential for high returns but come with market risk. However, with time on your side, you can weather market fluctuations and capture significant upside potential.

Real Estate: Real estate can offer both long-term capital appreciation and rental income, making it an attractive asset class for wealth creation. The key is to consider location, market conditions, and affordability.

Commodities: Commodities like gold or silver can act as a hedge against inflation and diversify a portfolio. For those seeking even more growth potential, other commodities like oil or agricultural products might be options, although they can be more volatile.

5. Long-term goals

For investors in the 20 to 40 age bracket, focusing primarily on high-return investments — such as equities and real estate — is ideal for long-term wealth accumulation. FDs should play a supportive role, providing stability and ensuring you have a portion of your wealth secured, but they shouldn’t dominate your portfolio.

In summary, keeping no more than 20% of your net worth in Fixed Deposits strikes a healthy balance. It may allow for financial security without sacrificing the growth potential that comes from taking on more risk in higher-return asset classes like equities, real estate, and commodities. The remaining funds should be allocated according to your risk tolerance and financial goals, aiming for diversification to mitigate risk and maximise long-term returns.