We will look at some of the prominent fixed deposit substitutes in this post, which include the potential for diversification, tax efficiency and higher yields.
SIP Investment
Systematic Investment Plans or SIPs are one of the most popular ways of investing in mutual funds as they allow investors to efficiently manage risk. In SIP investment, a small predetermined amount of money is allocated monthly for investment.
Through rupee-cost averaging, SIPs enable investors to make frequent, fixed-amount investments, mitigating the effects of market volatility. SIPs have the ability to yield more profitable returns over time than fixed deposits. Hence, SIP investment also fosters money management skills and helps accumulate wealth for the future.
Mutual Funds
A mutual fund is a pool of money managed by a professional fund manager and funded by many investors. They have become one of the most preferred alternatives to FDs owing to their potential for higher returns and professional management. Mutual funds offer a robust investment plan for investors, especially when guided by a financial planner.
Debt Mutual Funds
Debt mutual funds invest in fixed-income instruments, like government and corporate bonds, corporate debt securities and money market instruments, that offer capital appreciation. Debt mutual funds offer fixed returns and are considered less risky than mutual funds. Hence, they are also considered a better investment option than FDs for investors with lower risk appetite.
Public Provident Fund
Also known as PPF, a public provident fund is a government-run saving scheme that offers tax benefits and guaranteed returns. Under Section 80C of the Income Tax Act, the PPF investment is eligible for deductions up to a total of INR 1.5 lakh annually. The 15-year lock-in period promotes long-term capital accumulation and prudent saving.
Considering the tax saving part of the investment plan, financial planners often suggest PPF for long-term wealth creation.
POTD/ Post Office Time Deposit
Those looking for fixed income can consider investing in POTD. Similar to bank FDs, investors can save money for a definite period, earning a guaranteed return through the tenure of the deposit. As the money is invested and the government guarantees the interest generated, it is safer than a FD.
There are four tenure options available in a POTD: 1, 2, 3, and 5-year deposits. Any number of accounts can be opened at any post office, but only one deposit can be made in a single account. At the end of the deposit's tenure, the maturity amount comprises the capital deposited and the interest it earns.
With POTD, you can earn an interest rate between 6.90% – 7.50% p.a. for a tenure of 1 year to 5 years, which is considerably higher than FDs. Also, the Post Office FD interest rate on tax saving FD is up to 7.50% p.a. for general citizens as of December 2023.
Gold Investments
Financial planners often recommend gold investments as a valuable part of the best investment plan. Like fixed deposits, gold can shield against inflation and economic downturns.
However, gold investments can yield larger profits and give more freedom. Physical gold, sovereign gold bonds (SGBs), gold mutual funds and gold exchange-traded funds (ETFs) are among the investment choices available to investors. SGBs, in particular, are a great option for a diversified portfolio because they provide stable interest rates coupled with opportunities for capital development.
Equity Linked Saving Scheme (ELSS)
ELSS is a tax-saving mutual fund plan that offers tax benefits under Section 80C of the Income Tax Act. ELSS focuses mostly on stocks; hence, financial planners often consider it appropriate for individuals with a longer investment horizon and a greater tolerance for risk.
ELSS has the shortest lock-in period of any tax-saving instrument, at three years. Due to this feature, which allows investors to withdraw their money any time after the lock-in period, it is a well-liked option for wealth accumulation and tax planning.
National Pension System
The National Pension System, also known as NPS, is a government-regulated retirement savings programme that enables people to accumulate retirement savings. While FDs offer fixed returns, NPS returns are based on market fluctuations; hence, it can be the best investment plan for risk-takers.
It provides two investing choices: Auto Choice, which provides an asset allocation based on age and Active Choice, where investors can choose their asset allocation. Over and above the Section 80C limit, contributions paid to NPS are eligible for tax deductions under Section 80CCD(1B); meanwhile, interest earned on FDs is taxable. Furthermore, NPS permits partial withdrawals in specific situations.
Corporate FDs
Company fixed deposits or corporate FDs are offered by financial and non-banking financial companies (NBFCs). They are a type of term deposit with fixed interest rates kept for a predetermined time. If you want a higher interest rate and cumulative interest, corporate fixed-rate bonds are an excellent option.
These FDs usually offer interest-based distributions that are both cumulative and non-cumulative. Higher pay-outs and compounding returns are the outcome of reinvested interest in cumulative interest pay-outs. Because corporate FDs are not protected by deposit insurance, they are riskier than bank FDs. However, corporate FDs can be an alternative to think about for investors seeking higher returns and ready to assume a little bit more risk.
Conclusion
Although investment in fixed deposits is a safer option, financial stability and optimal returns can be achieved by implementing a balanced investment strategy that combines several options, like SIP investment, gold investment, NPS, etc. Moreover, to pursue financial success, it is important to make decisions about investments that are in line with personal financial goals, risk tolerance and time horizons. Financial advisors can offer valuable help in this regard.
FAQs
1) What gives better returns than FD?
Several options offer better returns than FDs, like SIP, NPS, PPF, mutual funds and corporate FDs. However, POTD offers higher returns, provides tax benefits and is safer than FD.
2) How do I get max returns from FD?
To enjoy maximum returns from FDs, one should plan their investment strategy. Consider laddering your FDs with different maturities to ensure liquidity and the opportunity to reinvest at potentially greater rates when your shorter-term deposits mature.
3) Is FD 100% safe?
Although FDs are considered safe, they aren't entirely risk-free. Certain risks are associated with FDs, like inflation risk, reinvestment risk, high taxation, default risk and liquidity risk. Hence, investors should conduct thorough research before investing in FDs.
4) Which investment has the highest return without risk?
All investments involve some level of risk; hence, diversifying your investment across various asset classes can help manage risk and enjoy high returns.
