Fixed Deposits are a favourite avenue of investment for most Indians. According to data, almost 57% of the household savings in India are invested in bank deposits.
But why do people invest in Fixed Deposits? Why does it still stay as the most favoured vehicle of investment among Indians?
- FD’s are safe because the RBI provides insurance for Bank Deposits.
- It serves the purpose of preserving capital.
- It does not require much research or market knowledge.
- They provide fixed and stable returns.
But the big question is, are these returns enough?
Don’t get me wrong; I am not saying Fixed Deposits are bad. I am simply saying that investing in Fixed Deposits alone may not be enough.
Want to know why? Read on as we discuss the inflation and post-tax effect on Deposits. We will also shine a light on some of India’s high return investments, which could serve as an alternative to Fixed Deposits.
Inflation and Post Tax Implications on Fixed Deposit
Bank Deposits in general return an average of 5% – 8% with a typical lock-in period of 5-10 years. But when we talk about returns, we only take into account the pre-tax returns. That’s right, interest on deposits are also taxable under the Income-tax laws.
Say you have invested ₹10,000 in a fixed deposit account, and it fetches your interest at 7%. The interest earned during the first year of investment will be ₹700. If you fall under the tax slab of 20%, then almost ₹140 would be taxed.
Considering that our country’s inflation rates are swinging high at an average rate of 7%, the post-tax interest earned on Fixed Deposits does not even beat inflation.
The pre-tax return of 7% will reduce to 5.6%, which may be lower than the rate of inflation.
What are the Best Alternatives to Fixed Deposits in India?
1. Public Provident Funds
Public Provident Fund investment is a long term investment scheme that offers an attractive interest rate on the amount invested. You can invest anywhere between ₹500 to ₹1,50,000 in a year in this scheme and can make the payment lump sum or instalments. The interest earned can be deducted from your total income for tax.
Currently, the PPF schemes earn a return of 7.10% compounded annually. Such rates are determined by the finance ministry and distributed on 31st March each year.
Since the government backs this scheme, there is a low risk attached. However, if you want to invest in a PPF scheme, you need to plan long term as the minimum tenure for the funds to mature is fifteen years. You can further extend its maturity in blocks of five years.
2. Mutual Funds
A company that pools money from its investors and invests that corpus into securities such as stocks or bonds is called Mutual Funds. You can buy shares of the mutual fund. Each share will represent your part ownership in the fund and its income.
There are several types of mutual funds, and some of the popular ones are Equity, Debt and Hybrid funds.
Equity MF as the name suggests invests all its corpus into the shares of various companies. Its ROI is higher than the other funds, but since it invests in Equities, the risk is also high.
Debt MF invests in bonds that are issued by the government, corporates and financial institutions. They are less risky, but the returns are also low.
Hybrid Funds invest in both Equity and Debt instruments proportionately. They provide a moderate ROI and have a moderate risk attached.
In general, Mutual Funds offer better returns than Fixed Deposits at an average return of 10% on investment.
Cryptocurrency means a new form of digital money that uses digital files as currency instead of paper—cryptocurrency functions as both – a medium of exchange and a store of value.
Almost 8000+ active cryptocurrencies are circulating in the market today. Some of them include Bitcoin, Ethereum, Ripple etc.
Most cryptos have a limited supply; if it has high utility and the demand for that coin increases, its value also rises.
For example, Bitcoin is designed so that there will be only 21 million BTC’s in total. So, as its utility becomes more prominent, more people want a share of this asset. Hence, its value increases multifold.
In terms of returns, cryptocurrency is one of the highest return generating asset by far. Since its inception, this new asset class has grown a million times in value. There are instances where early adopters of crypto have earned huge wealth from their investment.
Though crypto investments may sound like an expensive affair, Indian investors can start investing in crypto with a minimum investment of ₹100 – 500.
Platforms such as CoinSwitch Kuber make it simple for you to buy/ sell/ own cryptocurrency in a secure wallet.
Like I mentioned earlier, investing in Fixed Deposits is not a bad option. However, relying on Fixed Deposits alone to grow your wealth may not be a great idea.
There are many other better alternative investment options beyond Fixed Deposits that you can explore.
It is a good strategy to diversify your capital into many asset classes like the list above to reduce portfolio risk.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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