Top 8 Alternatives to FD

Once upon a time in the bustling land of finance, where investors roamed in search of greener pastures, fixed deposits (FDs) were the gold standard. These trusty FDs promised safety, assured returns, and simplicity. But as the financial landscape evolved, these once-reliable companions began to show their limitations, particularly their inability to keep pace with inflation. And so, the quest for more lucrative alternatives began.

This blog explores various investment options that offer better returns than FDs, while catering to different risk appetites and financial goals.

We all know that fixed deposits are low-risk investment options where you deposit an amount for a fixed tenure at a set interest rate. Though you’ll get the safety and the returns that are promised, the big downside is low interest rates, especially in the current high-returns environment.

Fortunately, there are many alternatives to FDs that not only offer better returns but also cater to various investment risk appetites.

List of Alternatives to Fixed Deposits

1. Mutual Funds

A mutual fund is essentially a collection of money managed by a professional fund manager. This fund is a AMC that gathers money from various investors who share a common investment goal. The pooled money is then invested in a mix of assets such as stocks, bonds, money market instruments, and other securities. The returns generated from these investments are distributed among the investors in proportion to their investment, after deducting any applicable expenses and fees.

• Better than FD: Mutual funds typically offer higher returns than FDs, making them a more attractive option for conservative investors.
• Investment Horizon: They are suitable for short to medium-term investments, ranging from a few months to a few years, depending on the type of debt fund.

2. Public Provident Fund (PPF)

PPF is a long-term investment scheme, popular among individuals who want to earn high but stable returns.

PPF is a long-term savings scheme backed by the government of India, offering tax benefits and attractive returns.

When you open a PPF account, you commit to depositing money regularly, either monthly or annually. The interest on these deposits is compounded annually, which means you earn interest not just on your contributions but also on the interest accumulated over time. This compounding effect helps grow your savings significantly over the years.

• Safe Investment Better than FD: PPF is one of the safest investment options, providing better returns than traditional FDs while also offering tax-free interest.
• Investment Horizon: With a lock-in period of 15 years, PPF is ideal for long-term financial goals such as retirement planning. Also, no liquidity gives you an advantage, where you cannot recklessly remove your money.

3. National Savings Certificate (NSC)

The National Savings Certificate (NSC) is a secure investment option offered by the Government of India through post offices.

It is designed to provide reliable returns and significant tax benefits under Section 80C of the Income Tax Act. This makes NSC an attractive choice for risk-averse investors looking for a safe and tax-efficient way to grow their savings.

• Better Option than FD: NSC provides higher interest rates compared to FDs, along with the benefit of tax savings under Section 80C.
• Investment Horizon: With a fixed maturity period of 5 years, NSC is suitable for medium-term investments.

4. Peer-to-Peer (P2P) Lending

P2P lending platforms connect borrowers with lenders directly, offering higher returns compared to traditional savings options.

You can either invest in Automated lending or Manual lending

Manual Lending

Manual lending offers a way to diversify your portfolio and earn good returns. This method provides you with complete control over your lending decisions, allowing you to conduct your research and analysis before committing funds.

With manual lending, you can select borrowers based on various parameters, ensuring that they align with your lending criteria. You can choose loan tenures that best suit your financial goals, ranging from a minimum of 1 month up to 36 months. This flexibility allows you to adjust your lending strategy according to your financial plans, offering both short-term and long-term investment opportunities.

Automated Lending

Stepping into the world of automated lending, the Fractional Matchmaking Peer to Peer Plan (FMPP) presents structured products designed to maximize returns through hyper-diversification. By spreading your investment across numerous borrowers, FMPP significantly mitigates risk and enhances the potential for higher returns.

Lumpsum Plan: This option allows for investments ranging from ₹10,000 to ₹50 lakh with tenures of one to six years. It offers simple interest rates of up to 15%, with payouts occurring at the end of the lending period. This plan is ideal for those seeking higher returns over a medium to long-term horizon.

Monthly Income Plan (MIP): Designed for those looking for regular income, MIP enables investments from ₹1 lakh to ₹50 lakh with tenures of one to three years. It offers simple interest rates of up to 10%, with monthly payouts. This plan is perfect for investors who want a steady stream of income while benefiting from the stability of diversified lending.

Why it is better than Fixed Deposits 

Start with as low as 500 INR: Start with an initial as low as ₹500. This allows you to distribute their lending amount across various loans, helping to diversify risk.

Selective Lending: You have the freedom to choose whom you lend to, using detailed demographic, financial, and credit assessments to make informed decisions.

Flexible Terms: You have the flexibility to choose the duration of the loans you lend into, with terms ranging from 1 month to 3 years. This allows for better alignment of your financial goals.

Both manual and automated lending options provide unique advantages, catering to different investor preferences and financial goals which is better than Fixed Deposits.

5. Corporate Fixed Deposits

A Corporate Fixed Deposit is a type of investment where investors place their money with companies for a fixed term, earning a predefined rate of interest. These deposits are typically issued by Non-Banking Financial Corporations (NBFCs) and Housing Finance Companies (HFCs). Corporate Fixed Deposits offer an attractive option for investors looking for stable returns over a specified period.

• Better Returns than FD: Corporate FDs provide higher returns than bank FDs, are more flexible, and provides liquidity making them an attractive option for investors seeking better yields.
• Investment Horizon: They can range from a 1 year to 5 year, offering flexibility to investors.

6. Equity Linked Savings Scheme (ELSS)

ELSS is a type of mutual fund that invests primarily in equities and offers tax benefits under Section 80C of the Income Tax Act.

• Investment Better than FD: ELSS has the potential to deliver higher returns compared to FDs, though it comes with higher risk due to market volatility.
• Investment Horizon: With a mandatory lock-in period of 3 years, ELSS is suitable for investors with a longer investment horizon and higher risk tolerance.

7. Real Estate

Investing in real estate can provide capital appreciation and rental income, making it a viable alternative to FDs.

• Better Returns than FD: Real estate investments have the potential for higher returns through property value appreciation and rental yields.
• Investment Horizon: Real estate is generally a long-term investment, suitable for investors looking to build wealth over time.

8. Gold

Gold has traditionally been a haven asset and a hedge against inflation.

• Safe Investment Better than FD: Investing in gold can provide better returns than FDs, especially during economic uncertainty.
• Investment Horizon: Gold can be held for both short-term and long-term horizons, offering flexibility to investors.

Factors to Consider

1. Risk Tolerance

Each alternative to Fixed Deposits comes with its own level of risk. While government-backed schemes like PPF and NSC offer high safety, options like  mutual funds, P2P, and real estate come with higher risk but also the potential for higher returns. Understanding your risk tolerance is crucial before making an investment decision.

2. Investment Horizon

Your investment horizon, or the period for which you can commit your money, plays a significant role in choosing the right investment. Short-term investments like P2P lending and mutual funds are suitable for immediate goals, while long-term investments like PPF and real estate are better for future financial needs.

3. Liquidity

Liquidity refers to how quickly and easily you can access your money. While FDs offer moderate liquidity with penalties for premature withdrawal, options like mutual funds and gold provide better liquidity. Real estate, on the other hand, is less liquid due to the time required to sell property.

4. Tax Implications

Tax efficiency is an important factor to consider. Investments like PPF and ELSS offer tax benefits under Section 80C, while others like mutual funds and corporate FDs may have different tax treatments.

5. Costs and Fees

Be aware of any management or administrative fees associated with the investment. Consider the cost of buying and selling the investment, including any commissions or transaction fees.

Conclusion

Fixed deposits have long been a trusted investment choice, but in today’s low-interest-rate environment, exploring alternatives is essential for maximizing returns and achieving financial goals. Whether you’re looking for safer options like PPF and NSC, or higher-yield investments like equity mutual funds and real estate, there’s a suitable alternative to FD for every investor. By considering your risk tolerance, investment horizon, liquidity needs, and tax implications, you can make informed decisions and build a diversified portfolio that delivers better returns.