Alternatives to FDs in India

Here is a list of 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 than equity mutual funds, and you can earn inflation-adjusted returns. There are 16 different types of debt mutual funds, the common 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. Regarding 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. 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. Government securities are a promising investment avenue if you want to invest your money for a longer tenure.

3. 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.

4. Corporate Fixed Deposits

Corporate fixed deposits are similar to fixed deposits with banks, but there are a few key differences. The primary difference is that, unlike bank FDs, these are accepted by Non-Banking Financial Companies (NBFCs) allowed explicitly by RBI. Moreover, corporate fixed deposits have a higher interest rate than bank deposits. Another critical difference is that DICGC does not insure corporate FDs, and if the corporation becomes insolvent, you may lose your entire investment. Corporate FDs have ratings that assert stability, like AAA, AA+, etc. The higher the rating, the more secure the deposit.

5. Recurring Deposits

Unlike fixed deposits, recurring deposits require deposits at regular intervals, say monthly, over the chosen tenure. You choose the amount and tenure 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.

6. National Savings Certificate (NSC)

The National Savings Certificate is another savings instrument that gives stable investment returns. These are available through Post offices and authorised bank branches. The lock-in period of NSC is five years, and the Government determines the interest rate. The interest rate for the quarter starting Oct 2022 is 6.8%. You can enjoy tax benefits under Section 80C of the Income Tax Act, 1961, thus helping you reduce your taxable income. You can claim a deduction on investments up to Rs.1.5 lakhs and reduce your tax liability by up to Rs.45,000 (if you fall in the 30% tax bracket).

7. 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 that 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.

Like 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. Public Provident Fund (PPF)

The Public Provident Fund is a famous 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 more.

The minimum investment amount is Rs. 100, while the maximum is capped at Rs. 1.5 lakhs. Like with the NSC scheme, the government also fixes and reviews the interest rates for the Public Provident Fund. The current interest rate is 7.1% for the Oct-Dec 2022 quarter.

Apart from partial withdrawals, loans against PPF can be availed up to a certain 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.

9. Fixed Maturity Plans (FMP)

Fixed Maturity Plans are a type of debt mutual fund with a twist. These funds are issued for a specified tenure, their lock-in period. You cannot redeem the fund before maturity. 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 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.

While fixed deposits have been a reliable investment choice, it's crucial to consider alternatives that match your financial goals and risk tolerance. Individuals can diversify their portfolios with options like mutual funds, PPF, gold investments, REITs, and SIPs for potentially higher returns and protection against market fluctuations and inflation. Conduct thorough research and seek advice from a financial advisor to develop a well-balanced and customised investment strategy.

When choosing alternatives to fixed deposits in India, consider risk, liquidity, tax implications, and investment horizon.

While choosing between the various investment avenues available for investment in India, investors should always consider the following factors:

• Risk: Different investment instruments carry different levels of risk. Always consider your risk tolerance before investing in any of the options mentioned above.
• Returns: The main reason why an individual opts for investment is to earn returns. All the financial securities offer differing returns. Define your financial goal before choosing where to invest.
• Evaluation: Carefully assess and adopt an informed approach when choosing alternatives to fixed deposits, ensuring alignment with your financial objectives and risk tolerance.

Personal Requirements: Choose your investment strategy by considering investment horizon, liquidity needs, and tax implications. This personalised approach maximises returns while safeguarding capital.

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.

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.