Is it Worth Investing in FD's now ? What are the Alternatives Available ?

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money Investment

FD's or Fixed Deposits have always been a favorite investment options of people. Understandably so, As there is no depreciation in the value at least visibly from the invested amount.

         Lets take a case where a person has invested in FD's which fetches return's of say 7.00% per annum, This means that the returns offered here is guaranteed by the Financial institution like Bank.

But in the current scenario where the inflation is hovering around 5% approximately, The inflation adjusted returns on these deposits made is around 3%, Adding tax on the interest earned into the picture the returns further diminishes. So is it sufficient to meet our goals and to achieve Financial Freedom?

Alternative to Fixed Deposit 

Most of you might be thinking then what are the alternatives available?. Hold on there is some good news for you there are other investment options or means available which offers more returns with more or less similar risks compared to the Fixed Deposits. Let's lists them one by one:

  • Debt Mutual Funds:
    • These are low risk mutual fund scheme where the money is mainly invested in debt instruments like bond papers of company bonds and government bonds which has a certain maturity period.
    • Based on the maturity period of these bonds there are different classes of debt mutual fund which are available like:
      • Liquid mutual fund:
        • it holds bonds which has the shortest maturity period around 1 day to 1 week etc. Its similar to overnight bond funds.
        • The interest rate or the returns offered by these instruments is similar to savings deposits.
      • Ultra short term Debt funds:
        • These are bonds which has a slightly higher maturity when compared to the liquid bond funds and offers a slightly higher returns compared to the liquid funds.
      • Short term Debt funds:
        • These funds have bonds which has a higher maturity and can offer returns more than the fixed deposits can offer.
      • Medium to Long term Debt funds:
        • These has the potential to offer returns more than Short term bond funds.
    • But the important thing here is the bond maturity period which determines the volatility of the fund.
    • One rule is Lower the Maturity for the bonds lower will be interest rate Sensitivity.
    • Therefore its preferable to choose Short term and Ultra short term to cover for most of the debt requirement  to strike a balance between the volatility and the returns offered.
    • While investing in these instruments one has to see the allocation of bonds in these mutual funds and its best to choose a fund whose majority of its allocation is in the highest rated bonds (AAA rated or A1 rated) to reduce the volatility.

  • Government Bonds or Bond Papers 
    • This type of instrument offers a slightly higher returns than the Fixed Deposits examples are treasury bills etc. 

Do leave your thoughts below on investing in FD's these days 😊

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