Indians love Fixed Deposits. The bulk of our savings lie in this form, i.e. long-term deposits placed with banks. The perception of safety that comes from having money lying with a Bank and an assured rate of return together made FD’s a very attractive option for investors, especially senior citizens.
But over a period of time, bank FD returns have not kept pace with inflation, forcing investors to consider other options to park their surplus funds. Let us consider a few of these and how they compare to Bank FD’s:
Corporate FDs
Companies that need to raise funds from the market frequently opt to raise it through Corporate FD’s. Details are typically available with major brokers, and the interest rates tend to be about 1% higher than comparable Bank FD rate. Unlike Bank FD’s which are considered low-risk (unless held with a co-operative or small private-sector bank), the risk profile of Corporate FD is determined by the credibility of the company issuing it. Consider the financial viability of the company before investing, and make sure it matches your risk profile. From a tax perspective, these are taxed similarly to Bank FD’s, with accrued interest due to be taxed in the hands of the recipient.
Government of India Bonds
These long-term bonds usually offer a return more or less the same as Bank FD’s, but in case the return rises above prevailing Bank FD rates (usually a short-term phenomenon) and you are comfortable with the longer holding period, you may invest in these. Interest remains taxable (unless specifically stated otherwise on the Bond issue documentation.
Debt Mutual Funds
We have written elsewhere about the usefulness of Debt Mutual Funds as an alternative to Bank FD’s, and would continue to advocate for holding them in the investor portfolio. While subject to somewhat higher risk of loss and even negative returns as compared to bank FD’s for the most part Debt Mutual Funds are a reliable avenue for long-term investment. Further, the dividend (if opted for) is tax-free in the hands of the investor, and capital gains are taxed at a concessional rate.
Fixed Maturity Plans from Mutual Funds
Some AMCs offer FMPs with a fixed tenure, similar to Bank FD’s. Typically the tenure is just slightly over 3 years. The rate of return tends to be close to, or slightly better than Bank FD’s, with the investment in instruments like Corporate FDs and Government bonds. The important thing here is that these are usually designed to be tax-beneficial, and the tenure is adjusted to ensure that you will end up paying a lower rate of tax in the form of Long-term Capital gain with indexation benefit.
Monthly Income Plans
MIPs are a little deceptively named. The ‘monthly dividend’ is not guaranteed (this writer himself holds at least one fund which has not paid a single rupee since September 2016) and neither is it always ‘monthly’, in the sense that you can definitely opt for quarterly and yearly payouts. In essence, MIPs are debt mutual funds that have an element of equity investment that goes from low (Conservative MIPs) to high (Aggressive MIPs). While they present an interesting alternative, they should be treated more like equity funds paying a small amount of dividend rather than a totally safe option. Like other debt funds, while dividend is not taxed in investor’s hands, capital gain would be taxed as long-term capital gain if held for more than 3 years and as short-term capital gain for lesser periods.
Others
There are other avenues to invest as well. The Public Provident Fund remains a popular and highly recommended investment, but with its lock-in period of 15 years, it is not quite comparable to a Fixed Deposit. Similarly, Kisan Vikas Patra, some types of Unit-Linked Insurance Schemes and even regular endowment Life Insurance can be seen as alternatives.
In conclusion, any investment advisor would recommend keeping a diversified portfolio. If you are young and have a stable career, you can opt for mutual fund-based investments, and avoid Bank FD’s altogether, while for those near the end of their careers, a judicious mix of investments with a certain amount of funds placed in the safety of the Bank FD is always a good idea..
