Opportunity cost refers to the potential benefits or returns that you forego by choosing one investment option over another. In the context of fixed deposits, it means the returns you could have earned from other investment opportunities but gave up because your money was locked into the fixed deposit.
For example, let's say you have $10,000 to invest, and you decide to put it in a fixed deposit with a 2% annual interest rate for one year. At the end of the year, you'll earn $200 in interest.
However, during the same period, the stock market experienced significant growth, and a well-performing stock could have given you a 10% return on your investment. If you had invested that $10,000 in the stock instead, you would have earned $1,000 in returns.
So, in this scenario, the opportunity cost of choosing the fixed deposit over the stock investment would be $800 ($1,000 - $200). You missed out on earning $800 by opting for the lower-return fixed deposit.
Opportunity cost helps illustrate the potential benefits you could have gained from alternative choices, helping you make more informed decisions about where to invest your money.
Is fixed deposit a good investment option? Read our explainer here.