Fixed deposits (FDs) offer a safer investment option with an assured rate of return and different investment periods to choose from. What if you could earn a slightly higher return without undertaking the risk associated with stocks, equity mutual funds, etc. Below are a few options that one might consider as alternatives to fixed deposits in India to diversify their portfolio:
Corporate Fixed Deposit
Financial Institutions and Non-Banking Finance Companies like Mahindra and Mahindra Finance FD, LIC Housing Finance FD, etc., offer fixed deposits for the general public to invest in. Companies FDs are similar to bank FDs with high safety coupled with a higher interest rate than bank FDs. An investor can choose the tenure of investment and also the distribution of interest rate i.e. monthly, quarterly, half yearly or annually just like bank FDs. However, corporate FDs are not as safe as bank FDs, and thus one must refer to the credit rating of fixed deposit assigned by a credit rating agency by past performance, fundamentals, financial and business risk and management quality of the company. It is advisable to go for companies with AAA or at least AA rating.
Debt Mutual Fund
Debt mutual funds are mutual funds that invest in debt or fixed income securities like treasury bills, corporate bonds, money market instruments, etc. Investor can opt to earn through dividend or capital appreciation due to changes in market dynamics. Although FDs offer assured return but debt mutual funds offer higher post tax return without the risk associated with equity mutual funds. If invested in debt mutual funds for more than three years, the capital gain is treated as long term and is taxed at a lower rate. Investor can also opt for dividend mode of earning which are non taxable in the h ands of investor. Another benefit of investing in debt mutual funds is liquidity. Any amount can be withdrawn at any time without loss of interest rate. However, penalty in the form of exit load is charged, which is not too high.
Debt securities are also assigned a ‘credit rating’, which should be used to evaluate the credit worthiness of issuers. Carefully analyze and pick debt funds whose credit risk is almost at par with FDs. Herein, it is important to underst and that most fixed deposits are AAA rated Implying very high safety of capital. It is a general belief that FDs are guaranteed by the government. But very few know that it is only to the extent of Rs 1 Lakh.
In case one decides to go for debt mutual fund, it is advisable to invest in fixed maturity plan (FMP). FMPs are closed ended debt scheme with a fixed maturity date and they, like debt mutual funds, invest in debt instruments like bonds, securities etc maturing on or before the date of the maturity of the scheme. For example if an FMP has a maturity of 1 year, it will invest in only those securities that too have a maturity of 1 year. They are like passive debt funds and do not carry any interest rate risk. However, FMPs offer very low liquidity as they can only be traded on the stock exchange where they are listed. Moreover, you can only withdraw from them once they mature.
also read : Are fixed deposit your safest bet?
