Bank FDs are a preferred investment avenue for Indians seeking risk-free investment and stable returns. While FDs are easily accessible, safe, and secured, they also lack the possibility of inflation-beating high returns. This is why many novice investors wonder if they should invest in FDs at all. This article outlines the pros and cons of FD investments while highlighting alternatives to FDs so that you can understand where to invest for better returns.

• FDs offer guaranteed, safe, and stable returns lower than market-linked instruments.
• Nominal returns from FD investments cannot beat inflationary pressures.
• Debt funds, liquid funds, real estate, direct equities, and ETFs are better alternatives to FD investments for investors who want higher returns and can shoulder higher risks.

Here’s a list of reasons why you should invest in FDs:

Guaranteed returns

FDs offer guaranteed returns on the invested principal. The corpus invested earns a fixed rate of interest throughout the FD tenure. In other words, your returns from the investment remain stable regardless of market fluctuations.

Liquidity

Liquidity is yet another advantage of FD investments. Fixed deposits are highly liquid investments that can be redeemed at any time by the investor. It generally takes anywhere between a few hours to a day to receive your FD corpus once you submit the withdrawal request and your FD certificate to the lender.

Easy access

FDs are one of the easiest investment avenues in India. Anyone can open an FD account for as little as Rs. 1,000. This makes FDs ideal for small investors with limited capital for investment.

Capital safety

This is arguably one of the most important advantages of FDs. Fixed deposits are risk-free investments where the capital invested is not subject to market risks. Since your returns are immune from market swings, they remain stable, and the principal invested also remains protected. Bank FDs enjoy an additional DICGC insurance cover of up to Rs. 5 Lakhs per depositor. This insurance protects the investor in case the bank defaults or goes out of business.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

Low returns

Fixed deposits may offer higher returns than savings accounts, but returns are still nominal at best when compared to other investment instruments like equities. FD rates generally range from 6%-8%, which may not be enough to beat inflationary pressures. Therefore, if you want inflation-beating returns, you probably should not invest in FDs.

Penalty charges on withdrawals

While FDs are considered liquid investments, redeeming your investment partially or completely comes at a cost. Most lenders charge an interest rate penalty of up to 2% if the FD corpus is prematurely withdrawn before the maturity due date. This can further reduce your earnings from the already nominal yields.

No major tax benefits

Fixed deposit investments do not offer any major tax benefits. Other instruments like PPF and NPS qualify for EEE status, allowing you to claim benefits on the principal, interest, and maturity proceeds. You can only avail of tax benefits u/s 80(C) with a tax-saver FD, which comes with a mandatory 5-year lock-in period.

From the pros and cons discussed above, it’s clear that FDs are not everyone’s cup of tea. There are other fixed-income securities you can consider to tackle some of the drawbacks of FDs. If you’re wondering where to invest for better returns without increasing your risk exposure, here’s a list of options you can consider:

Debt funds

Debt mutual funds are MF schemes that invest in debt securities like corporate and government bonds, CDs, T-bills, and money market instruments. Debt funds are less volatile than equity funds and offer stable returns due to the fixed-income nature of their underlying securities. This makes them a prudent alternative to FDs.

Liquid funds

Liquid funds are a subtype of debt funds that serve as a potent alternative to FD investments. Liquid funds invest in short-term debt securities with maximum maturities of up to 91 days. As the name suggests, liquid funds are highly liquid, meaning you can access your money at any time. Unlike FDs, liquid funds do not carry penalty charges on early withdrawals.

Fixed maturity plans

Fixed maturity plans, or FMPs, are debt mutual funds that invest in fixed-income assets. These plans have a set maturity date. This means your invested capital is locked in for a specific time frame, which can range from a few months to a few years. While FMPs offer higher returns, they are less liquid than other alternatives to FDs.

Government bonds

If you’re looking for a safe investment option with fixed returns, you can consider government bonds. Government bonds are issued at a fixed or floating coupon rate, ensuring stable returns. Since these bonds are backed by a sovereign guarantee, your invested capital remains well-protected. Depending on your investment goals, you can choose from both long and short-term bonds.

The debt instruments mentioned above offer decent returns without increasing your risk quotient. However, the returns from these avenues are modest at best. So, if you’re wondering where to invest for better returns and don’t mind taking on slightly higher risks, you can consider the following investment alternatives to FDs:

Equities

Investing in equities directly through the stock market can help you earn high inflation-beating returns. However, selecting individual stocks, executing trades, and managing your portfolio requires considerable market knowledge. If you lack the time and expertise, you can opt for equity funds to invest in the stock market. Equity mutual funds primarily invest in stocks of companies to earn high returns. However, investing in equities is riskier since stock prices are subject to market volatility.

Real estate

Real estate is another good alternative to FD investments. You can invest in real estate directly by purchasing land or a residential/commercial property. Alternatively, you can invest in real estate through REITs or Real Estate Investment Trusts that pool funds from investors to invest in high-value properties.

ETFs

ETFs are exchange-traded funds that invest in a diversified basket of securities like stocks, bonds, and gold. These investments are passively managed, tracking particular market indexes to offer similar returns. You can invest in ETFs directly through major stock exchanges because they trade on exchanges like regular stocks.

In a nutshell, FDs are a great investment option if you are a low-risk investor looking for stable and guaranteed returns that may be nominal. In this case, you should invest in FDs. However, if you want better returns, you can invest in other market-linked options like mutual funds, equities, liquid funds, government bonds, and real estate. But remember that these investments carry greater risks of capital loss. So, if you prioritise capital safety, you should consider investing in an FD.