Top Alternatives to Fixed Deposits

A fixed deposit scheme helps you invest a lump sum of money for a fixed tenure and at a fixed interest rate. This allows you to earn guaranteed returns, regardless of market volatility. Hence, they are preferred by investors who have a low-risk appetite.

Fixed deposits fall in the debt instrument category. Like them, other debt instruments available in the market help you save and earn a stable income on your savings. The debt market is, therefore, extensive, enabling you to choose from a wide range of options that can act as alternatives to fixed deposit accounts. These alternatives have different features and benefits, but the returns remain constant. Some can even deliver better returns and offer tax benefits to help you create a higher corpus.

Read on to know more about alternatives to FDs.

Top 9 Alternatives Of FD

Here’s a look at the top 9 alternatives of FDs that you can invest in:

1. Debt mutual funds

Debt mutual funds invest primarily in debt instruments. Like a regular mutual fund, it offers a diversified portfolio managed by professional fund managers. Since the fund invests in debt, the credit risk is lower in comparison to equity mutual funds, and you can earn inflation-adjusted returns. There are 16 different types of debt mutual funds, the prominent ones being:

• Liquid funds
• Short duration funds
• Medium duration funds
• Long-term funds
• Gilt funds

You can invest in these funds depending on your financial goals and investment horizon.
When it comes to returns, you get an indexation benefit if you redeem your investment after 36 months. This benefit considers the effect of inflation and reduces your tax liability on long-term capital gains.

2. Money Market Fund

A Money Market Mutual Fund is a type of debt fund that focuses on lending to corporations for periods of up to a year. These funds are tailored to optimise returns while managing risk through adjusting lending durations, with longer loan tenures typically offering higher returns. These funds are particularly suitable for investors with an investment horizon of 3-6 months or more.

They provide a secure investment option with minimal risk of loss, especially for those who stay invested for over six months. Additionally, Money Market Funds often yield better returns compared to Bank Fixed Deposits of a similar duration, making them an attractive choice for investors seeking a balance between safety and profitability in short-term investments.

3. Government securities

Government securities are one of the most secure debt instruments you can choose. These securities are usually issued for the long-term and earn a stable return. So, if you want to invest your money for a longer tenure, Government securities can be a good avenue.

4. Corporate bonds

Corporate bonds are debt instruments issued by companies in need of funds. These bonds carry a fixed rate of interest. Most corporate bonds are also traded on the stock exchange,  making them liquid and thus providing liquidity whenever needed. 

5. Corporate fixed deposits

Corporate fixed deposits are similar to fixed deposits with banks with some key differences. The primary difference is that, unlike bank FDs, these are accepted by Non-Banking Financial Companies (NBFCs) specifically allowed by RBI. Moreover, corporate fixed deposits have a higher interest rate compared to bank deposits. One other key difference is corporate FDs are not insured by DICGC, and in case of the corporation becoming insolvent, you may lose your entire investment. Corporate FDs have ratings that assert their stability, like AAA, AA+, etc. The higher the rating, the more secure the deposit.

6. Recurring deposits

Unlike fixed deposits, recurring deposits require deposits at regular intervals, say monthly, over the chosen tenure. You choose the amount you want to deposit and the term of the deposit. For example, you open a recurring deposit account of Rs.1000 for five years. You would have to deposit Rs. 1000 monthly for the next 60 months. The account will mature after five years when you get a lump sum that includes the invested amount and the returns earned thereon.

7. National Savings Certificate (NSC)

Exchange Traded Funds (ETFs) are instruments similar to mutual funds, except that they can be bought and sold on exchanges, like stocks. The Bharat Bond ETF is a unique ETF which invests in bonds issued by public-sector undertakings, i.e., companies owned and managed by the Indian Government.

There are different types of Bharat Bond ETFs based on the maturity of the underlying assets. For example, Bharat Bond ETF 2023 invests in bonds with medium-term maturity. On the other hand, Bharat Bond ETF 2030 invests in bonds that have long-term maturity.

The ETF invests in high-rated bonds of Government companies – a trait that makes it risk-free. You can buy and sell the ETF at your convenience as there is no lock-in period. The minimum investment is Rs.1000, while the maximum is capped at Rs.2 lakhs.

Similar to debt mutual funds, the returns earned enjoy an indexation benefit if you hold it for more than 3 years, thus making them tax-efficient.

8. Bharat Bond ETF

Exchange Traded Funds (ETFs) are instruments similar to mutual funds, except that they can be bought and sold on exchanges, like stocks. The Bharat Bond ETF is a unique ETF which invests in bonds issued by public-sector undertakings, i.e., companies owned and managed by the Indian Government.

There are different types of Bharat Bond ETFs based on the maturity of the underlying assets. For example, Bharat Bond ETF 2023 invests in bonds with medium-term maturity. On the other hand, Bharat Bond ETF 2030 invests in bonds that have long-term maturity.

The ETF invests in high-rated bonds of Government companies – a trait that makes it risk-free. You can buy and sell the ETF at your convenience as there is no lock-in period. The minimum investment is Rs.1000, while the maximum is capped at Rs.2 lakhs.

Similar to debt mutual funds The returns earned enjoy an indexation benefit if you hold it for more than 3 years, thus making them tax-efficient.

9. Public Provident Fund (PPF)

The Public Provident Fund is a popular investment avenue for resident Indians. It has a lock-in period of 15 years, wherein you have to invest every year to keep your account active. You can also extend the scheme’s maturity in blocks of 5 years if you want to stay invested for a more extended period.

The minimum investment amount is Rs. 100, while the maximum is capped at Rs. 1.5 lakhs. Like with the NSC scheme, the government fixes and reviews the interest rates for the Public Provident Fund as well. The current interest rate is 7.1%.

Apart from partial withdrawals, loan against PPF can also be availed upto some limit. The amount you invest in the PPF account is allowed as a deduction under Section 80C. The interest earned and the maturity amount are tax-free, making the PPF scheme the most tax-efficient of all debt instruments.

10. Fixed Maturity Plans (FMP)

Fixed Maturity Plans are a type of debt mutual fund, but with a twist. These funds are issued for a specified tenure, which acts as their lock-in period. You cannot redeem the fund before the tenure. The term of the fund mirrors the tenure of the underlying securities. For instance, if the FMP has a term of one year, the securities in which it invests will also have a one-year term.

FMPs are low-risk investments that also offer the indexation benefit if you redeem them after 36 months.

11. Gold Investments

Gold investments offer a variety of options for investors looking to diversify their portfolios. Physical gold, like coins and bars, remains a classic choice, providing tangible assets. For those preferring more modern methods, gold exchange-traded funds (ETFs), Sovereign Gold Bonds and exchange-traded Funds (ETFs) allow trading in gold-backed investments on the stock exchange, mirroring the market price of gold. 

Let’s take a look at some of the most popular forms of gold investment:

• Gold futures, options, and forwards provide opportunities to trade gold at future prices, with varying levels of commitment and choices. 
• Another convenient option is Internet Investment Gold (IIG), where investors buy gold online and store it in professional vaults. 
• Regular gold savings plans also enable investors to accumulate gold over time through small, periodic purchases. Lastly, gold certificates offer a blend of physical ownership and digital convenience, representing stored gold that investors can claim. 
• Each method offers different benefits, from physical possession to ease of trading, tending to diverse investment strategies and risk appetites. 

12. Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a company that deals with income-generating real estate. It works like a mutual fund, letting ordinary people invest in real estate:

• Ownership: REITs own or finance properties that produce income.
• Accessibility: They allow anyone to invest in real estate, similar to buying stocks or through funds like ETFs.
• Income: Investors earn from the property’s income without needing to manage or finance it.
• Popularity: Common in retirement plans like 401(k)s and IRAs, making them a part of many Americans’ investment portfolios.
• Benefits: Offers dividend income and supports community growth.

REITs make real estate investment accessible and profitable for regular investors, not just big financial institutions.

13. Systematic Investment Plans (SIPs)

SIPs are a systematic approach to investing in mutual funds or stocks, where you invest a small, fixed amount regularly, typically every month. This method helps manage market risk better and cultivates financial discipline by encouraging consistent savings. The key principles of SIPs are Rupee Cost Averaging and Compounding.

Rupee Cost Averaging is investing the same amount of money regularly, which helps to average out the cost of your investments over time. Rupee Cost Averaging smooths out the average purchase cost over time, minimising risk by acquiring more units when markets are low and fewer when high.

Compounding, meanwhile, significantly boosts investment returns over long periods. SIPs offer flexibility in investment amounts and convenience, as they can be set up online with minimal hassle.

14. Equity-Linked Savings Schemes (ELSS)

ELSS mutual funds, unique for their tax-saving benefits under Section 80C, invest predominantly in equities. They are attractive for their dual benefits: potential high returns due to equity exposure and tax efficiency.
ELSS funds have a short lock-in period of three years, the least among Section 80C investments, and allow investments as low as Rs. 100 per month. This makes them an efficient tool for wealth accumulation and tax saving, often yielding higher returns compared to traditional tax-saving options like FDs or PPFs.

15. National Pension System (NPS)

The National Pension System is a versatile pension scheme open to all Indian citizens, not just government employees. It allows individuals to invest in a pension account during their working years, offering a mix of equity and debt investments.

The scheme’s flexibility is evident in its portability across jobs and locations, and it provides tax benefits under Sections 80C and 80CCD. Upon retirement, NPS allows partial withdrawal of the corpus, with the remainder paid out as a monthly pension, making it an invaluable tool for private sector employees seeking a steady post-retirement income.

How will Lower Interest Rates Affect Investments?

In the case of fixed-income securities, lower interest rates mean lower returns. So, as the interest reduces, returns also fall; this is true in the case of securities like the NSC, PPF, etc., whose rates are determined quarterly. However, with fixed deposits, the interest, once set, does not change even if the interest rates fall.

On the other hand, securities traded on the stock exchange, like bonds, enjoy higher prices when interest rates fall. As such, you can sell your bonds in the stock market for a higher rate.

Thus, a falling interest rate can be a negative factor for some alternatives to FD while a positive factor for others.

Final Thoughts

If you want to diversify your portfolio, you can opt for any of the alternatives mentioned above to FDs. Understand the pros and cons of each option, align it with your goals and investment horizon, and then make the right choice.

Frequently Asked Questions (FAQs)