Category: Investment Management

Alternatives to Investing in Debt Fixed Deposits

Are you still following the traditional investing options for the spare money in your account popularly known as Fixed Deposit [FDs]? If you answered a YES, this post is exactly for you, as we educate you with different and smart invest options.

Why Are Debt Mutual Funds an Excellent Alternative To Fixed Deposits?

Let’s do a comparative study of the two investment options Debt Mutual Funds and Fixed Deposits to know which is better?

Feature Debt Mutual Fund Fixed Deposits
Safety Of Capital Ratings deduced from the portfolio they are invested in and are mostly of range AAA FDs for amount upto One lakh are AAA rated but beyond that limit credit rating of Bank comes into picture
Returns Offer higher Post Tax Returns Assured Returns
Earning You get capital appreciation or dividend. You earn interest
Taxes 1.       First Year Tax – Same as FD

2.       One – Three Year – Lower tax

3.       More than three years – nil tax.

Same rate is applicable as your income slab
Liquidity Even debt funds in some cases charge “exit load” but the return earn is directly proportional to the amount invested in, and you can withdraw the amount anytime. You may have to penalty andlose interest in case you break the FD before its due date to avail cash

Invest in Fixed Deposits route for secure and steady investments

If you are looking for –

  1. Very Short term fund needs like 1-3 months
  2. Assured returns
  3. Capital Protection
  4. An ideal investment option

Then Fixed Deposits [FDs] are a perfect choice. But make sure to keep the following points in mind –

  1. Pick Corporate FD’s that offer higher interest rate than Bank FDs
  2. Invest in top-notch banks or companies FDs
  3. Do not invest more than 10% of net worth in FDs of a single firm

What is a smarter investment, a gold ETF or fixed deposit?

Any investment option could be profitable under certain circumstances. Just, for example, Fixed Deposits are a good choice for short-term investment, in a similar way Gold ETFs or Exchange Traded Funds whose price is derived from Gold units could be beneficial when you are planning for a wedding but not good when planning to buy a home. Let’s make a comparison chart–

Parameter Gold ETF Fixed Deposits
Returns Produces pre-tax returns Produces Pre-tax returns
Liquidity Charges in case of pre-mature withdrawal Charges in case of pre-mature withdrawal
Risk Of Loss Of Capital Secured as regulated by SEBI Secured as recognized banks offer most
Taxes An individual can restrict the effective taxes to less than 10% if held for more than three years. Directly linked to the tax slab, so in case you fall under higher tax rate slab, FD’s does not offer you interest that could beat the inflation.


When and why should you invest in Debt Mutual Funds?

If you are looking for –

  1. An investment option that is not affected by equity market volatility
  2. Stable investment returns with minimum to nil volatility.
  3. Investment option that has freedom to access your money anytime and does not come with lock-in.
  4. Offer Post-tax returns i.e. Dividend/interest which is tax free and  Capital Gains

Then Debt Mutual Funds is the best investment option for you.

Is a fixed deposit your only option? Alternatives to FDs

Not really, if you have some spare cash kept in your savings account, and you are looking for options other than Fixed Deposits –

Corporate Deposits / Debentures

Corporate Fixed Deposits are similar to FDs offered by banks except that firms offer them like L&T, Mahindra Finance,HDFC, etc. The interest rates are higher than the bank FDs.

Government and PSU bonds

The public-sector enterprises or government to finance their needs issues bonds regularly. These bonds are safe and offer decent returns. Some of the examples are – recently Food Corporation of India raised a good amount of money when they issued their bonds.

Debt Mutual Funds

As we just saw in above lines Debt Mutual funds are another alternative option to Fixed Deposits, they are of three types –

  1. Liquid Funds
  2. Ultra Short Term Funds
  3. Short Term / Income Funds
  4. Medium Term bonds
  5. Long tenure bonds

10 Best Investment to get regular monthly income

If you are looking for investment options that could also be handy to earn a regular monthly income, here is a list of them –

  1. Post Office Monthly Income Scheme – The ROI offered under this scheme is 8% forfive An individual who invests would get principal + bonus at the end.
  2. Fixed Deposits – An individual could get an FD from any bank and get interest on monthly basis.
  3. Senior Citizen Saving Schemes – Applicable only for people who are 60 years or above, scheme comes witha maturity of 5 years and ROI is 9% per annum
  4. Monthly Income Plans from Mutual Funds – Some MFs offer regular income in the form of dividends. The returns fluctuate from 8-9%
  5. Systematic Withdrawal Plan [SWP] – theMutual fund is most attractive investment option in India. If you have invested in equity or debt mutual funds, you can generate regular monthly income from mutual funds by selecting SWP
  6. Dividend from Mutual funds -Certain Mutual funds have theoption of dividend payout. If you don’t want to invest in equity directly, you can opt for mutual funds with dividend payout.
  7. Dividend from Equity -Equity investments are risky in nature. But if you have knowledge and skill you can make excellent money in stock market.
  8. Rent from Real Estate -Real estate is another good way to generate regular income. Real estate investment is high-risk, high return affair. You can generate income by renting property purchased by you.
  9. Long-term Government Bond-Long term government bond is one of the safest options to get regular income. Government bond usually offers 8% return half-yearly. These bonds are long-termbonds, and at the end of the tenure you will get back your principal amount
  10. Annuity from Insurance companies -Annuity from Insurance plan is also one option to generate regular monthly income. But this option will take the time to generate income. Returns on these schemes will depend on pension tenure and which option you have made while buying the product.

Which is a better Investment Option- FD or FMP or Debt Fund?

Let’s take an example. – Assuming an investor has invested Rs 1,00,000 in an FD and FMP for three years. Please find below the working on post-tax returns from both investments

Particulars FD FMP
Amount invested 1,00,000 1,00,000
Tenure 3 years 3 years
Date of investment 01 July 2014 01 July 2014
Date of Maturity 01 July 2017 01 July 2017
Rate of interest 9.00% 9.00%
Maturity Value 1,29,503 1,29,503
Interest amount 29,503 29,503
Tax 9,736 1955
Post tax return 1,19,767 1,27,548
Net return after tax 19,767 27,548
Post tax return percentage 6.20% 8.45%
Indexation Figures    
FY Cost inflation index figure    
13-14 939 Rate 10.211 %
14-15 1024 Rate 9.052%
15-16 1081  Rate 5.566%
16-17 1125 Rate 4.070 %
17-18 1226 Assume at 9%
*Tax calculation on Interest after indexation on FMP  
Indexed cost of Acquisition 1,19,727
Maturity Value 1,29,503
Gain/Loss 9,776
Tax@20% on gain after indexation 1,955

Should you invest in capital protection funds?

Capital Protection Funds are a type of debt funds that comes with less risk. It is a close-endedschemesimilar to FMP and does not allow redemption before maturity. The way the instrument protects investor money is by investing a part of it in fixed-income instruments such as bonds, T-bills, and certificates of deposits (CDs) and rest in equities. Some of the features are –

  1. Have maturity period of one, three and five years
  2. Volatility attached as are exposed to equity market
  3. SEBI has mandated rating for the funds with AAA being the highest rated

We hope we have answered your queries on what the alternatives to FDs.If you still have any unanswered questions or need help, feel free to contact us here.

We would be glad to help you with your planning and investment related decisions.

Samiksha Seth

Content Strategist Dilzer Consultants Pvt Ltd


24 February 2017