Alternatives to Fixed Deposits

Taking up from the last post

There are various investment avenues to choose from and that makes the task of an investor that much more challenging. Most of us really are never educated about how to handle money, how to grow it, where to invest to save tax etc. This has led to a lot of misguided selling & a lot of people losing money in various places and hence resorting to only one funda, FD is the best. Let me just try to list a few other places where an investor can invest.

1.) Real Estate (Land)
A pretty popular avenue these days with high paying salaries and wanting to save tax.
This topic we shall not discuss.
2.) Gold
Another popular and favourite means, we shall skip this as well. However, I would like to point out
that average return of Gold per year in the last 30 years is 9.30% only!!!
3.) PPF
A relatively better instrument, gives tax free interest the only problem with this is the cycle of
completion is long and you can only invest maximum 1 lac per year.
4.) Mutual Funds
As a matter of perception a lot of people associate mutual funds only with equity funds or risky
instruments, which is really not the case. Mutual funds are a lot more than just equity. Let me
broadly classify different types of funds.
a) Equity Funds
b) Debt Funds – This can be further divided as under :
i) Bond/Income Funds
ii) Liquid Funds
iii) Fixed Maturity Plans (FMP)

c) Hybrid Funds

There also are many other avenues like Private Company Fixed Deposits, National Savings Certificates, Postal MIS etc which we will avoid discussing.

Equity funds shall be discussed later and Hybrid funds later as well. We will look at one of the direct competitor of Fixed Deposits that is Fixed Maturity Plans.

Fixed Maturity Plans as the name suggests are are debt schemes, where the corpus is invested in fixed-income securities. The tenure can be of different maturities, from one month to three years.

Basically they invest money where the money earns interest, they invest for a fixed period and at the end of the period they will pay the investor the proceeds.

Difference :

i.) Liquidity – The difference with an FD is that an FD can be liquidated in between(prematurely) FMP is almost impossible to redeem prematurely, though it can be transferred. If you are not sure you will not hold the FMP to maturity, it is better to opt for an Fixed Deposit.

ii.) Return Assurance – Whilst on an Fixed Deposit certificate you get a rate of interst printed. FMP returns are not guaranteed. Although FMP returns are more or less around the Fixed deposit rates, the fact remains that the mutual fund company will not give you any assurance in writing about your rate of return. I am sure you must be wondering why would you go for a Fixed Maturity Plan at all.

iii) Taxation – Assuming you are in the highest tax bracket below is the main reason why anyone in the top tax bracket should never go for a Fixed Deposit unless he has plans to withdraw it prematurely.

We shall assume that the FD and FMP both are giving 9% annual return.
Now the Govt of India has declared Cost Inflation Index for the year 2014-15 as 1024.

Please take a look at the below table :

Untitled

This table clearly show’s how much money will a person in the top bracket take home post tax. Fixed Maturity Plan’s with indexation benefit and without indexation benefit clearly win hands down against a Fixed Deposit.

Please understand that Govt of India every year announces a Cost Inflation Index. Which means that any gains equal to this Inflation index will not be taxed. However, you have to select an instrument that has indexation benefit.

Now if you have understood nod your head and if not let me have your questions! 🙂

I will be glad to explain and interact! 😀

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9 thoughts on “Alternatives to Fixed Deposits

    • hitchy says:

      I could recommend FMP’s!

      For a young guy like you though you must think of equities… I am sure you have a few FD’s already! So equity aur uske baad you can again go to FMP’s!

  1. Bikramjit says:

    oh man that is very hi fi .. its got me all confused now..

    LAND:- well in the current scenario especially for people like us who live abroad very very scary to buy land .. people just take over .. I just managed to sell Mine THANK GOD..

    Gold is a good but I am not into all that sadly .. I heard that Indusbank something are giving 13% interest, that works good for me here , as uk bank give maximum 1% or 2% and If i take a loan i pay about 4 to 5% .. so take a loan here and deposit in india on 13% .. what d oyou say 🙂

    What would you suggest me, I should do since I live in UK.. which is SAFE..

    • hitchy says:

      I doubt any bank will pay 13% interest on Fixed deposits.

      However, comparing to UK the interest rates are certainly much higher in India. When you take a loan at 4-5% and invest in India at say 9% ( more or less you will get interest rate around this only, atleast in secure and safe banks )

      Understand that TDS will be deducted at 10% on the interest, to claim the TDS you will have to either file returns here. Having done all that you also have to consider the exchange rate fluctuation. If you still think that is feasible you should do it. As a thumb rule for anyone who lives in India and wants to invest in India, I never advise anyone to take a loan and invest.

      In your scenario though the interest rate has a huge difference so maybe it can be done.

      I have a client in Saudi who gets a loan at 3% and he invests in equity with me in India and his returns on his portfolio is 23% 😛 😛 😀

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