Venturing Into The Unknown: Navigating Venture Capital vs. Fixed Deposits

Bank deposits in India have experienced significant growth, with an increase of nearly INR 12.2 lakh crore to reach INR 186.2 lakh crore in the current financial year (as of January 13). This surge happened due to the positive notion people carry about fixed deposits¹.

However, investment opportunities are not limited to traditional options. More and more people are considering venture capital as an excellent investment option as well.  In fact, in 2022, India secured the fourth position on a global scale in terms of venture capital investments, with remarkable growth.

If you are curious to compare these poles apart investment options and gain insights that can help you make informed financial decisions, read on till the end.

What Is Fixed Deposit?

Fixed deposits or FDs are an investment option where you deposit a certain amount of money with a bank or financial institution for a fixed duration. During this time, your money earns a fixed interest rate, which remains unchanged throughout the tenure. At the end of the agreed-upon period, you receive your initial investment amount and the accumulated interest.

Characteristics Of Fixed Deposits: A Traditional Investment Option

The following are the characteristics of Fixed deposits:

Assured Returns

Fixed deposits present predictable returns as the interest rates are fixed at the time of investment. However, the returns are usually very low. 

Low-Risk

Fixed deposits are known as low-risk investments, as the principal amount is usually secure. Banks and financial institutions provide insurance up to INR 5 lakhs per depositor per bank under the Deposit Insurance and Credit Guarantee Corporation (DICGC)².

Liquidity

Fixed deposits offer liquidity options like premature withdrawal and loans against the deposit. However, these options may come with certain conditions and penalties.

Capital Preservation

Fixed deposit is not directly affected by market fluctuations. Thus, the principal amount you invest remains intact.

Tax Implications

If you are a taxpayer, you have the option to invest in tax-saver fixed deposits. These fixed deposits are eligible for tax deductions as per Section 80C of the Income Tax Act³. 

What Is Venture Capital?

Venture capital is a form of investment that focuses on financing startups and early-stage companies. In this type of investment, venture capitalists provide funds to these businesses in exchange for an ownership stake. The goal is to back companies with high growth potential and help them flourish in their initial stages. 

Venture capitalists also offer strategic guidance and industry expertise to increase the chances of success. They take calculated risks, aiming to earn significant returns when the invested companies achieve substantial growth and profitability. 

Characteristics Of Venture Capital Investing

The following are the characteristics of Venture Capital investing:

High Risk-High Reward

Venture capital investments are considered high-risk and have a higher failure rate (over 50%)  due to startup uncertainty and volatility. While the risk is high, venture capital investments also offer the potential for high returns⁴. Thus, they fall under high-reward investments. Successful startups can generate substantial profits, leading to significant gains for investors.

Diversification Of Portfolio

The startup economy continues to boom across various markets. This provides you with abundant investment opportunities and hence diversifies your investment. Moreover, since no one can predict which startup may propel so small investments across various types of startups can help you get better returns.

Contribute To Ideas That Matter To You

Unlike fixed deposits, venture capital investments provide you with the opportunity to choose the right startups for you. You can invest in those industries and markets that align with your interests and passion.

Opportunity To Create An Impact 

Investing in startups allows you to create a greater impact on society. It allows you to be part of the success story. Moreover, they help in job creation and bring innovations to the market. This leaves a lasting impact on the economy. Thus, as an investor, you can impact the life of several individuals and communities.

Prospective Returns: Comparative Analysis

Fixed deposits offer relatively stable and predictable returns compared to venture capital investments. However, over the past 20 years, covering the period from 2000 to 2023, the average fixed deposit interest rate in India decreased from 10.50% to 5.90%⁵. 

The interest rates for fixed deposits also vary based on the period of FD and the specific bank or financial institution. For the general public, the interest rates can range from 3.00% p.a. to 9.50% p.a. from 7 days up to 10 years⁶. However, senior citizens are often offered higher interest rates on fixed deposits, ranging from 0.50% to 0.75% above the rates offered to the general public⁷.

Moreover, it is important to note that the return on investment should exceed the inflation rate after deducting the tax consideration to reap returns. Generally, this is not the case with fixed deposits. The interest rate on fixed deposits tends to be lower than the rate of inflation. This is because interest rates of FDs depend on numerous factors like economic conditions, repo rates, etc.

On the other hand, venture capital investments do not offer certain or fixed returns like fixed deposits. However, multiple success stories highlight venture capital as high-reward investments.

One example is Google, which received $25 million in venture funding in 1999⁸. The venture capitalists experienced significant returns as Google became an integral part of the internet.

Another example is WhatsApp, which received venture capital funding from Sequoia. Sequoia invested around $8 million in 2011. Over the years, it invested around $60 million⁹. Later when Facebook acquired WhatsApp for $16 billion, Sequoia's investment yielded substantial returns, amounting to billions of dollars.

But, that doesn’t mean there aren’t any failure stories. Here is the story of Yik Yak. Yik Yak was initially launched in 2013 and was a popular platform where people could post anything anonymously. The company generated around $74 million in VC and was worth over $400 million at its peak. Despite that, the company was sold for just $1 million because it pivoted from its core value¹⁰. Thus, it is wise to do your research before making any investment decisions.

Considerations In Choosing Between Venture Capital And Fixed Deposits

If you are confused between Fixed deposits and Venture capital, then keep the following things in mind:

Risk Appetite

You should assess your risk tolerance and investment goals. If you prefer stability and capital preservation, fixed deposits may be more suitable. However, venture capital investments can be considered if you can tolerate high risk and seek potentially higher returns.

Investment Horizon

You must consider your investment horizon. Fixed deposits are usually short-term investments, while venture capital investments require a longer commitment.

Diversification

Diversifying your investment portfolio is crucial. Fixed deposits are a conservative option, while venture capital investments provide exposure to high-growth potential companies. Balancing both can help you to mitigate risks.

Expertise And Research

Venture capital investing requires in-depth knowledge of the startup ecosystem. If you lack expertise, sticking with fixed deposits; your preferred investment instrument or investing through a reliable venture capital firm may be wiser.

Liquidity Needs

You must evaluate your liquidity requirements. Fixed deposits offer more flexibility for early withdrawals, whereas venture capital investments are illiquid and may tie up your funds for an extended period. However, certain exit strategies like sale or acquisition, merger, and liquidation of assets allow you to get returns on your investments and access funds previously tied up in illiquid securities. 

The Bottom Line

Choosing between venture capital and fixed deposits depends on your risk appetite, investment goals, and liquidity needs. Fixed deposits offer stability and predictable returns, while venture capital investments carry higher risk but the potential for greater rewards. 

If the idea of favourable risk-reward investments in startups excites you, but you're unsure about choosing the right opportunities, sign up with Grip. Grip offers you the chance to invest in carefully curated startup opportunities and provides various alternative investment options for diversification and predictable returns. 

Take control of your investment journey and explore curated non-market linked opportunities with Grip!

References:

1. The Times of India <https://timesofindia.indiatimes.com/business/india-business/powered-by-fds-bank-deposits-up-rs-12l-cr-in-fy23/articleshow/97428266.cms> 
2. Reserve Bank of India <https://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=272>
3. The Economic Times <https://economictimes.indiatimes.com/wealth/tax/tax-saving-fd-highest-interest-rate-tax-benefits-premature-withdrawal/articleshow/98685169.cms>
4. Harvard Business School <https://www.hbs.edu/faculty/Pages/item.aspx?num=39710>
5. Bajaj Finserv <https://www.bajajfinservmarkets.in/>
6. Bank Bazaar <https://www.bankbazaar.com/fixed-deposit-rate.html>
7. Bank Bazaar <https://www.bankbazaar.com/fixed-deposit-rate.html>
8. Google News <https://googlepress.blogspot.com/1999/06/google-receives-25-million-in-equity.html>
9. CB Insights <https://medium.com/@CBinsights/the-top-5-vc-bets-of-all-time-72bff048e661>
10. f3fundit <https://f3fundit.com/11-of-top-startup-failures-in-history/> 

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