Introduction
So, are you still investing in fixed deposits?
Yes, FDs have been the first choice for assured returns but the low interest rates of today may not make them suitable to help you outrun inflation.
Well it is time for you to reconsider.
In reality with FD rates in the range of 5-6% wise investors are looking at non fd investment options which provide far superior returns t0 tax efficient and flexible.
So, whether you are in it for looking at higher-yield, tax-saving strategies for diversifying today’s market does provide a wider breadth of investment options to give your fixed deposits a run for their money.
How about you//Read More Seeking to earn more on your hard earned cash?
These are 5 smart alternatives to fixed deposit for you, which could grow your wealth significantly faster than traditional FDs; read on.
Understanding Fixed Deposits.
Fixed deposits are a type of debt investment. They have predetermined interest rates and maturity dates. The investor is given a receipt upon putting money into a fixed deposit, which records how much of the FD is held; what interest will have been payable; and when that day arrives for settlement. Maturity date is the time when an investor can expect their capital back Fixed deposits yield regular income: monthly, quarterly, annually. And the principal is also guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC) to Rs. 5 lakhs per person But fixed deposits have different maturities from a minimum of only 7 days up to 10 years. If you want to draw money ahead of time, there’s an extra charge for early withdrawal.
Historical Returns from Bank FDs?
A fixed deposit is the convenient and most reliable way to earn interest on your savings. In the Indian context, the interest rate on fixed deposits varies from 6.5% up to 9% in 2024.
If we look at the historical data of the last 20 years, Fixed deposits have given returns of :
Source: Bajaj Finance
Real returns from FDs are surprisingly very low for individuals who like to keep their savings in FD instead of options that are alternative to fixed deposits.
Real return is the return earned after subtracting inflation and taxation. Let us understand using the example below.
Impact of taxation:
Assuming a 20% tax is charged on the interest rate of 8%, the tax rate is 1.6% (8% x 20%). The post-tax return on the FD after tax is 6.4% (8%—1.6%).
Impact of inflation:
The average inflation rate in 2022 was 6.7%. If we take the inflation rate and reduce it from the FD returns after tax, we are actually left with negative returns of 0.30%. In other words, the investor will face erosion in the real value of his capital when investing in bank fixed deposits.
1. Debt Mutual Funds
Risk Level: Moderate
Expected Returns: 6% – 9%
Debt mutual funds invest in fixed-income instruments like government securities, corporate bonds, and treasury bills. They are less volatile than equity mutual funds, making them a suitable option for conservative investors looking for better returns than FDs. Various types of debt funds (e.g., liquid funds, short-term funds) offer flexibility based on your risk appetite and investment horizon.
Pros:
- Higher returns than FDs
- Tax-efficient if held for more than three years (due to indexation benefits)
Cons:
- Returns are not guaranteed
- Interest rate risk
2. Public Provident Fund (PPF)
Risk Level: Low
Expected Returns: 7% – 8% (current rate: ~7.1%)
PPF is a government-backed savings scheme that offers tax-free returns and is an excellent long-term investment for individuals with a low-risk appetite. With a lock-in period of 15 years, PPF encourages disciplined savings. Contributions to PPF also qualify for tax deductions under Section 80C of the Income Tax Act.
Pros:
- Tax-free returns
- Government-backed, making it risk-free
Cons:
- Long lock-in period (15 years)
- Limited liquidity
3. Equity Linked Savings Scheme (ELSS)
Risk Level: High
Expected Returns: 12% – 15%
ELSS is a type of mutual fund that primarily invests in equities. It offers the dual benefits of potentially high returns and tax savings under Section 80C. Though it has a mandatory lock-in period of three years, ELSS funds have historically delivered higher returns over the long term, making them an ideal choice for those willing to take on more risk.
Pros:
- Higher returns compared to traditional savings options
- Tax benefits under Section 80C
Cons:
- High risk due to equity exposure
- Returns are market-dependent
4. Corporate Fixed Deposits
Risk Level: Moderate
Expected Returns: 7% – 10%
Corporate FDs are offered by companies and typically offer higher interest rates compared to bank FDs. However, these are not as risk-free as bank FDs, as they depend on the creditworthiness of the company offering them. Choosing well-rated corporate FDs from reputed companies can mitigate some of the risks.
Pros:
- Higher returns than bank FDs
- Fixed tenure, predictable returns
Cons:
- Risk of default
- Lower liquidity compared to bank FDs
5. National Pension Scheme (NPS)
Risk Level: Moderate to High
Expected Returns: 8% – 10%
NPS is a government-sponsored pension scheme aimed at helping individuals save for retirement. It offers market-linked returns, with a mix of equity, corporate bonds, and government securities. Investors can choose their own asset allocation or opt for auto-allocation based on their age. Contributions to NPS are also eligible for tax benefits under Section 80C and 80CCD.
Pros:
- Flexible investment choices
- Additional tax benefits
Cons:
- Limited liquidity (partial withdrawal rules)
- Mandatory annuity purchase at retirement
Conclusion
Finally, although FDs seem to be a safe bet, they hardly strive against inflation and come in the high tax bracket. While company fixed deposits provide slightly better interest over bank deposits, there is that risk involved.
For one thing, fixed deposits are also not very liquid and you cannot easily get your hands on the money. These debt mutual funds have lesser exposure to domestic equity, provide superior returns, greater liquidity and more favorable tax benefits making them a more attractive choice for investors.
In case you wish to diversify your portfolio, you can consider any of the alternative to fixed deposits listed out here. You have to be sure that a specific option is potential for you in accordance with the features it offers and how it fits with your investment scenario and horizon. Remember to ask your financial advisor for guidance on investing in them.