Fixed deposits are the best investment option for entirely risk-averse investors. However, some of the fixed deposit alternatives have gained popularity in recent years. Let us explore why.
An excellent option for the conservative investor, it seeks a regular income from a fixed deposit. It is convenient and hassle-free; all it needs is you to deposit a lump sum for a fixed tenure, and you would earn an assured interest. Also, fixed deposits are not exposed to market fluctuations.
With the changing investment environment, however, people are ready to take more risk for better returns that are also tax efficient. And for those considering options other than a fixed deposit, there are several funds one can choose from.
Alternatives to Fixed Deposits
Debt Mutual Funds
Debt mutual funds invest in comparatively secured investment options such as corporate bonds, government securities and money market instruments. These are considered relatively safer than other mutual funds as they invest in high-rated fixed income securities.
However, these funds are sometimes vulnerable to depreciation and appreciation. But despite this, debt funds are capable of offering much higher returns than fixed deposits. They are highly liquid and can be an excellent alternative to fixed deposits.
Liquid funds are a type of debt funds that invest only in high-rated money market instruments that mature within 91 days. The most significant advantage of liquid funds is that they provide liquidity which fixed deposits fail to do so. Therefore, you can not only use liquid funds as an alternative to fixed deposits but also as a means to accumulate emergency corpus to fall back on at times of crisis. Liquid funds are the most secured mutual funds as they invest in high-quality instruments.
These are a type of mutual funds and are great at beating inflation. It requires a portfolio manager to invest the investor’s funds for ownership of a business, which is also known as equities, like common stocks of publicly traded companies.
Forming an excellent alternative to the long-term fixed deposits, they are known for returns that are predominantly higher than fixed deposits. The risk level involved with equity funds is lower when it comes to long-term investments.
Corporate Fixed Deposits
For investors willing to take a little more risk, one can choose from corporate fixed deposit options which are nothing, but an FD offered by corporates. The interest rates for a corporate FD is much higher than a bank FD with flexible tenure options.
The downside to this form of investment is that these are not as secure as bank fixed deposits and investors should choose to invest only well-established companies.
Fixed Maturity Plans
Fixed maturity plans invest in debt instruments and securities with coinciding maturities. For example, if a fixed maturity plan has a maturity time of 1 year, it will invest in bonds, securities, and other similar options having a maturity period of less than a year.
The flexibility of early withdrawal is not present, and the fund can be accessed only at the time of maturity. Therefore, it is advisable to be careful while deciding on investing in this option as your money would be locked-in until maturity.
Fixed maturity plans are an excellent alternative to a fixed deposit, but they are not very liquid. But on the bright side, the risks associated with investing in these are very low and assure a comparatively higher return.
In India, these are possibly the best-known alternative to fixed deposits even though the returns generated by government bonds are only slightly higher than a fixed deposit. The lock-in time for these investment instruments is longer, but they offer the investor the option of diversifying their portfolio.