10 Alternatives To Fixed Deposits (FD)

Rising inflation rate and cost of living are forcing Indians to consider alternatives to fixed deposits. Limited income and growing obligations force individuals to stick to fixed deposits, which offer security but meagre returns. However, the landscape is shifting. The search for more rewarding yet secure options is becoming more urgent. This blog will guide you through 10 alternatives to fixed deposits that could provide a more favourable balance between safety and financial growth.

What Is A Fixed Deposit?

It is an investment tool where you place a specific amount of money with a financial institution, for a designated duration. The return on this deposit is determined at the outset and does not fluctuate during the investment period. Durations can vary widely from a week to several years based on individual preference.

Investors can choose to have the interest credited periodically or reinvested until the end of the term. Compared to regular savings accounts, FDs typically offer more favourable returns, appealing to those who prefer low-risk, predictable outcomes. Once the term concludes, the initial sum, along with the accumulated interest, is returned to you.

Why Should You Consider Alternatives To FD?

Though FDs provide a sense of security, they have certain constraints that may hinder your financial progress. Before sticking with this traditional choice, it is important to recognise the risks involved. Considering these factors may prompt you to explore better alternatives to FD.

Risks Associated with Fixed Deposits

1. Limited Access To Your Money

A fixed deposit offers limited access to your money that is locked up until maturity. The maturity period of a fixed deposit may range from months to years. The withdrawal of your deposit prior to the maturity date invites a reduced interest rate or a hefty fine.  

2. Lower Returns

Even though a fixed deposit offers a higher interest rate than your savings account, it is still very low compared to other investment assets available in the market. Today, a maximum of 6-7% annual interest rate is offered by a few Indian banks for deposits below two crores. 

3. A Weak Shield Against Inflation 

While fixed deposits offer greater protection for your capital but with lower returns, they fail to shield your capital against another impending risk: inflation. Suppose the inflation rate in India stands at 6%, a fixed deposit scheme that offers a 6% interest is like parking your hard-earned money with no investment return at all! 

4. A Boring Investment Venture

While today’s market offers a wide array of exotic investment assets with greater returns, fixed deposits stand as a safer yet boring investment that has very little investment return to offer. If you are looking for active participation in the investment world, a fixed deposit is probably not a suitable investment asset for you.

Today, we have got some great alternatives to FD that could offer better returns. Let us take a look at some of them. 

10 Alternatives To FDs In India

1. National Savings Certificate Or NSC

NSC is a secure investment option offered by the government, accessible through post offices and some banks. It has a five-year lock-in period, with the current (September-2024) annual interest rate set at 7.7%, compounded yearly and paid upon maturity¹. 

NSC allows you to claim deductions under Section 80C of the Income Tax Act, reducing your taxable income by up to INR 1.5 lakhs. Instead of being paid out, the interest accumulates over the term, making it suitable for long-term goals. Additionally, NSC can be pledged to obtain loans, providing an extra layer of utility.

2. Lease Investment

Lease investment is a unique option for those looking to move beyond FDs. It involves purchasing a property and leasing it to a tenant, often for extended periods, generating regular revenue.

What sets lease investment apart is its relatively low risk. The tenant usually handles expenses like maintenance and taxes, which reduces the financial burden on the property owner. Many agreements also include provisions for gradual rent increases, offering a buffer against inflation. This type of investment not only ensures a stable income but also provides a measure of protection against rising costs, making it a valuable addition to a diversified portfolio.

3. Public Provident Fund (PPF) 

PPF is one of the popular long-term investment vehicles with government backing. You can start with a deposit as low as INR 500, while the maximum you can contribute annually is INR 1.5 lakhs. The fund has a maturity period of 15 years, and if you wish, you can extend this in blocks of five years.

The current return on PPF, set at 7.1% (till September 30-2024), is periodically revised by the government². A significant advantage is its favourable tax treatment. Investments are eligible for deductions under Section 80C. Although the fund has a lengthy lock-in period, partial access to your funds is allowed after seven years, promoting disciplined financial planning for long-term goals.

4. Government Securities (G-Secs)

These include instruments like Treasury Bills (T-Bills), which cater to short-term needs, and government bonds, designed for extended investment periods. T-Bills are available with maturities– 91, 182 or 364 days - and are bought at a discount, with no periodic payouts, making them ideal for short-term financial strategies.

In contrast, government bonds, which can last up to 40 years, deliver semi-annual interest, offering consistent returns throughout their term. Additionally, State Development Loans (SDLs), issued by state governments, offer a similar structure but with variable durations from 3 to 35 years.

This range of government-backed securities appeals to those who seek a reliable, low-risk investment, allowing flexibility across both short and long-term financial objectives.

5. Corporate Bonds

Corporate bonds can be a compelling option for those exploring alternatives to FD for better returns. These debt instruments allow companies to raise funds by borrowing from investors, who, in turn, receive interest payments over a specified term. Unlike equity investments, purchasing these bonds makes you a lender to the company rather than a part-owner.

An advantage of the bonds is the steady income they provide through regular interest payouts. Each bond comes with a set maturity date making them useful for planning specific financial goals. The creditworthiness of the issuing company is reflected in the bond’s credit rating helping investors understand the associated risk. However while they often yield better returns than FDs, corporate bonds do carry risks like market volatility and inflation.

6. Debt Funds

These funds put your money into avenues like government securities, corporate loans, and treasury bills. They tend to be more stable than stocks. You can choose from options like liquid, short-duration, or gilt funds, each with a specific purpose.

A major advantage is that you can access your money when needed, without facing large penalties. This makes these funds a smart choice if you want both reliable returns and some flexibility.

7. Corporate Fixed Deposits 

These FDs are issued by Non-Banking Financial Companies or the NBFCs and other firms. The deposits tend to offer more attractive interest rates. One significant difference from bank FDs is the lack of insurance protection. Corporate deposits are not covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), so if the issuer encounters financial trouble, your investment may be at risk. 

Evaluating the credit ratings of these deposits is essential, as they indicate the stability of the issuing entity. High ratings like AAA suggest a safer investment, while lower ratings could imply greater uncertainty. Investors considering corporate FDs should weigh the potential rewards against the risks, and conduct thorough research into the issuing entity’s financial health before making a commitment.

8. Recurring Deposits (RDs)

RDs offer a structured way to accumulate wealth over time. Instead of investing a lump sum, you make regular, fixed contributions each month for a specified period contributing to monthly income.

With flexible terms, RDs lock in the interest rate at the start, ensuring consistent returns. The interest is compounded periodically, and at the end of the term, you receive the total of your deposits plus the interest earned.

This option is particularly beneficial for those who prefer gradual savings rather than a one-time investment. However, accessing the funds before the end of the term is generally discouraged and might incur penalties. RDs are suitable for individuals aiming to build their savings steadily with the assurance of fixed returns.

9. RBI Floating Rate Savings Bond

These bonds offer a secure investment option with a dynamic interest rate. Adjusted every six months, the rate is tied to the NSC plus an additional 0.35%, with interest paid out twice a year³.

These bonds have a tenure of seven years, making them suitable for medium-term financial planning. Though they cannot be traded or transferred, they provide stability with returns that adapt to inflation trends. The interest, while taxable, ensures a consistent income, offering a safe haven for those wary of market volatility.

10. Fixed Maturity Plans (FMP)

FMP are structured as closed-ended debt mutual funds, providing a time-bound investment strategy different from traditional FDs. These funds have a set duration, during which your capital is invested in assets like corporate bonds or government securities that mature alongside the plan.

One of the distinct features of FMPs is their ability to offer relatively predictable outcomes. By aligning the fund's term with the maturity dates of its investments, you can gauge your potential returns at the start. 

However, FMPs require a commitment, as the funds cannot be accessed before the end of the term unless sold on the stock exchange, which carries its own risks. This makes them a suitable choice for those looking to achieve specific financial goals within a defined timeline, combining steady growth with tax efficiency.

Bottomline

Considering various options beyond FDs can lead to more tailored outcomes, whether you are seeking higher yields, greater liquidity, or tax advantages. Every investment avenue presents unique benefits and challenges. By carefully assessing how each fits into your overall financial plan, you can select the most suitable path for your objectives.

Stay informed and discover top investment opportunities by exploring Grip Invest today!

References:

1. National Savings Institute, accessed from https://tinyurl.com/ybyb47fb 

2. National Savings Institute, accessed from https://tinyurl.com/225h4erh

3. RBI Retail Direct, accessed from https://rbiretaildirect.org.in/#/FaqFrsb

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