Risk And Reward: Startups Vs. Fixed Deposits - Making The Case

Any investment can be characterised by the risk and reward it offers. While FDs offer stability and security, Startups promise exponential growth and high returns. However, as an investor, you need to be ready for the worst. You must be aware of these contrasting choices' potential gains and pitfalls.

This blog gives you insight into investing in fixed deposits and startups. It tells you about the risks and rewards each presents.

Fixed Deposits

Fixed Deposits are prevalent because they are stable and reliable. They offer a pre-determined interest rate over a fixed period, suitable for conservative investors. You can earn periodic fixed returns, with the principal amount staying intact. The risk level is less, so it is considered a haven in volatile markets.

Advantages Of Fixed Deposits

• Low Risk: Fixed deposits are a safe choice for investors. Due to stable returns, they combat market fluctuations and preserve capital. 
• Guaranteed Returns: Fixed deposits bring in returns over a fixed period, a blessing for investors and a delight for senior citizens. According to the Economic Times, several banks offer their senior and super-senior citizen clients higher interest rates¹. The increased rates lie between 50 and 75 basis points (bps) per the bank's policies.
• Regular Income: Fixed deposits facilitate regular income through interest payments. Some individuals live off their investment income as a result. In addition, time-to-time increase in interest rates by regulatory bodies makes fixed deposits attractive to investors².
• Accessibility And Flexibility: Fixed deposits are easily accessible and offer flexible terms. You can choose the investment duration, short or long, based on your financial requirements and enjoy the assurance of fixed returns.
• Diversification: Fixed deposits reduce the risk of investment. You can add a low-risk asset and diversify your portfolio - a stable affair in a volatile market. 

Drawbacks Of Fixed Deposits

• Low Returns: Fixed deposits are less promising than high-return investment options like Corporate Bonds, Asset Leasing, and Invoice Discounting. 
• Inflation Risk: Fixed Deposits may struggle against inflation, reducing the deposited amounts purchasing power over time.
• Lack Of Liquidity: Funds deposited in fixed deposits are often locked in for a specific period. An investor does not have access to the funds before maturity. Any early withdrawal leads to penal interest charges.
• Limited Flexibility: Fixed deposits thrive on predetermined terms. So, investors can not switch up their investment strategy or access funds during the deposit tenure. This is why banks now provide flexi-fixed deposits that decrease liquidity woes. 
• Opportunity Cost: Investing in Fixed Deposits results in missing out on potentially higher-return opportunities in the market.
• Interest Rate Risk: Fixed Deposit interest rates remain fixed throughout the deposit period. However, they become less attractive if market interest rates rise significantly.
• Taxation Impact: The interest earned on Fixed Deposits is subject to taxation, reducing overall returns. Of course, the investor's tax bracket also plays a role in this.

So, before opting for Fixed Deposits, consider these drawbacks. Besides, also assess your individual financial goals, risk tolerance, and investment time horizon. 

Startups: Unleashing Their Return Potential

Investing in startups is an enticing opportunity for investors seeking growth and significant returns. Startups are young, dynamic companies and have the power to grow tremendously. 

Advantages Of Investing In Startups

• High Growth Potential: Startups are often based on innovative ideas. Moreover, their small size and minimal bureaucracy make them agile and can disrupt markets. Also, their scalable models can lead to rapid expansion. These traits highlight that startups have immense growth potential. 
  As of 2023, India's space-tech startup ecosystem is thriving, with significant investment in the sector³. This is proof that successful investments in startups can be highly profitable. These companies have immense potential for growth and value creation. 
• Capital Appreciation: Promising startups have lower initial valuations. As the company expands and succeeds, its value increases. This leads to higher share prices. When early investors sell their shares, they reap profits. This way, early-stage investors with a good eye for promising startups can benefit from substantial capital appreciation as the company grows.
• Participation In Innovation: Investing in startups allows individuals to be part of the entrepreneurial ecosystem. They can innovate and contribute to solving existing problems in the market.
• Job Creation: Startups are often engines of job creation. They are significant facilitators of economic growth and employment opportunities in various sectors. According to a FICCI-Randstad survey, around 80% of early-stage startups in India are to increase their workforce in 2023⁴. Over half of the startups cite higher pay and job security concerns as the main reasons for the change.

Drawbacks Of Investing In Startups

• Uncertain And Competitive Environment: Startups operate in a highly uncertain and competitive environment. So, it is challenging to determine whether they will succeed.
• Demand Uncertainty: The startup's product or service may need to do better or perform as expected, which could take a toll on its growth prospects and potential for returns.
• Regulatory And Compliance Issues: Startups can fail to operate or grow due to obstacles caused by regulatory changes or compliance issues.

Importance Of Understanding Risk And Reward In Investment Decisions

Understanding the relationship between risk and reward is crucial when making investment decisions. When choosing between the two, having sound opinions on risk tolerance, investment goals, and time horizons is essential.

• Risk Tolerance: You can assess your comfort with investment fluctuations and decide whether low-risk fixed deposits or higher-risk startups are more suitable.
• Investment Goals: Fixed Deposits provide stability and regular income, while startups offer potential long-term growth and higher returns.
• Time Horizon: Fixed deposits are ideal for short to medium-term goals, while startups require a longer time horizon to grow and generate profits.

Risk And Reward: Comparative Analysis

Investors should clearly understand their differences and similarities to balance risk and rewards. Here is a closer look at the comparative analysis:

Conclusion

Investing in Fixed Deposits and Startups represents contrasting choices, each with its risks and rewards. Fixed Deposits offer stability, security, and predictable returns. On the other hand, Startups provide the thrill of entrepreneurship and innovation. They can bring growth and possibly astonishing returns, albeit with higher risks. 
At Grip, we recognise that every investor has unique goals and preferences. Our role is to provide you with the information and guidance you need before choosing. Whether you decide on the stability of Fixed Deposits or the potential of Startup Investing, it will be in your best interest. 

References:

1. The Economic Times <https://economictimes.indiatimes.com/wealth/invest/these-banks-offer-higher-fd-interest-rates-for-super-senior-citizens/articleshow/101690615.cms?from=mdr> 
2. CNBC Tv18 <https://www.cnbctv18.com/personal-finance/rising-interest-rates-make-fixed-deposits-preferred-choice-among-investors-study-15878161.htm> 
3. The New York Times <https://www.nytimes.com/2023/07/04/business/india-space-startups.html>
4. The Economic Times <https://economictimes.indiatimes.com/tech/startups/about-80-of-early-stage-startups-to-increase-workforce-in-2023-ficci-survey/articleshow/99062198.cms?from=mdr> 

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Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/. 
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