Many people think that FDs are the safest investment options available to them. This is indeed true because FDs are insured by DICGC upto 1 lakh per depositor per bank. There are lot of investment products available with similar or better risk-return profile that an individual can consider as better alternatives for FDs.
ADVANTAGES of FD
1. Guaranteed returns: The interest rate on fixed deposits is fixed and guaranteed, so investors know exactly how much they will earn on their investment.
2. Safety: Fixed deposits are considered a low-risk investment option because they are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The insurance limit however, is restricted to a maximum of ₹1 lakh per depositor per bank.
3. Easy to understand: Fixed deposit is an easy to understand investment option, thus making it a popular choice among investors of all ages.
Disadvantages of FD
1. Low returns: The interest rate on fixed deposits is generally lower than other investment options such as stocks, mutual funds, and real estate.
2. Inflation risk: The returns on fixed deposits may not be able to keep up with inflation, which means the purchasing power of the returns may decrease over time.
3. Limited flexibility: Fixed deposits lock in the investor’s money for a fixed period of time and it may not be possible to access the funds before the maturity date.
4. Taxable: Interest earned on fixed deposits is taxable, which may impact the returns earned.
5. Not suitable for long term investment: Fixed deposits are not suitable for long-term investment as interest rates may be low and you may not be able to beat inflation.
There are other investment products available but you should first think about your asset allocation based on your risk tolerance, financial goals and investment horizons. You should also consult with your financial advisor to select the best product suitable to your needs.
Every financial asset can be broadly classified into one of these two groups, Equity or Bonds. In equity you have partial or full ownership of asset, you will make or lose money based on the performance of underlying assets. Whereas in bonds you get a certain fixed return on investment.
Bond funds are the closest alternatives to Bank FDs. While investing in bond terms, an investor must choose a fund that aligns with investor time horizon. For maximizing risk-reward ratio in bond fund, you must describe your quality & maturity requirements based on your investment objective
1) Quality – (AAA, AA, A, etc) It represents credit worthiness of bonds, it means the bond issuer capability in repaying principal and interest payments.
2) Maturity – (Short term, intermediate term, long term) It represents when will the bond mature and investor gets their principal and interests payment.
Type | Maturity |
Overnight Fund | 1 day |
Liquid Fund | less than 3 month |
Ultra Short Fund | 3-6 month |
Money Market Fund | less than 12 month |
Low Duration Fund | 6-12 month |
Short Duration Fund | 1-3 year |
Medium Duration Fund | 3-5 year |
Long Duration Fund | more than 5 year |
It is worth checking the returns on your FD with returns on the bond fund of similar maturity.
Feel free to schedule a call with us here Consult Us, we will help you create an investment plan best suited for your goals and investment objectives.