Who doesn’t love a safe investment opportunity? Especially in a country like India, where many people don’t even invest their money thinking they’re keeping it safe.
However, many of us have found a safe investment haven in fixed deposits. Offering returns, fixed deposits have long been viewed as a fantastic investment option.
But, times are changing. In today’s high-inflationary environment, FDs may not be the same attractive investment option that they once were. Moreover, with the availability of other high return investment options (like LenDenClub’s P2P investments), choosing FDs may not be the smartest option.
Before we talk more about that, let’s understand FDs in more detail.
What is a Fixed Deposit Investment? – Definition & Working Explained
As the name suggests, when you opt for a fixed deposit, you deposit a fixed amount of money with a bank for a specified period of time, usually between 12 and 60 months. The investor is not allowed to withdraw the invested amount before the completion of the pre-decided tenure.
In other words, if you invest ₹100,000 in an FD for five years, you will not be allowed to withdraw this money before the 5-year tenure is over. If you decide to withdraw your money before the five year period is over, you will have to pay a penalty.
In exchange for leaving your money with the bank, you will be paid a fixed interest rate on your investment. Opting for a longer term of investment will yield higher returns because most organisations pay a higher interest rate on long term investments in FDs.
Benefits of Fixed Deposits?
Fixed deposits are incredibly popular in our country, and for some very good reasons. These include:
- Fixed Returns
Almost no other investment instrument offers reliable fixed returns. Since the assurance of the return comes from a bank, you can be rest that you will be paid on time.
- Safe From Market Fluctuations
Be it the Coronavirus pandemic wreaking havoc on the market, or the ongoing Russia-Ukraine war, FD interest rate payments remain unaffected. No matter how the bank or the market is performing, FD interest rates are paid as per the initially agreed terms. In other words, your investment in an FD is safe from any and all market-related risks.
- Income Tax Benefits
Tax saving FDs enable investors to claim tax deductions against their investments under section 80C of the Income Tax Act of 1961. Investors can claim deductions of up to ₹1.5 lakh every year. Another benefit of investing in an FD is that banks are instructed to not deduct any tax from the interest amount unless it crosses the ₹10,000 threshold.
An Insight into Corporate Fixed Deposit & How It’s Different from FD
When a private company or a non-financial banking company offers a fixed deposit scheme, it is known as a corporate fixed deposit. Corporate FDs offer two advantages over regular FDs.
One, the interest rate offered for corporate FDs is usually higher than bank FD rates. This is especially relevant today as bank FD rates (usually between 5% and 6%) barely allow investors to keep abreast with the rising inflation rates. In comparison, most corporate FDs pay an interest rate of more than 6% to long-term investors. Some even offer interest rates as high as 7.48% for investors that choose a 5-year tenure.
The other benefit is that the penalty period for corporate FDs is shorter. According to Government guidelines, investors that withdraw their money within the first three months of depositing it in an FD account shall be penalised. Beyond the three-month period, it is up to the bank or NBFC to decide the penalty period. For instance, if you withdraw your money from an SBI bank FD before maturity, you will have to pay a penalty. This period is usually shorter (usually around 3 months) in the case of corporate FDs, providing more flexibility to the investors.
P2P Lending Vs Mutual Funds Vs Fixed Deposits – Know Which Should You Choose
P2P lending is one of the most exciting new investment instruments and it is gaining popularity serious popularity these days. The reason is simple, P2P lending platforms present an opportunity for investors to earn superb returns without having to deal with market volatility.
As the name suggests, P2P lending platforms enable investors to become lenders and invest their money in the form of loans. When you choose an RBI registered NBFC-P2P like LenDenClub, the only real risk you face with P2P lending is the slim likelihood of the borrower defaulting on their payment.
The reason we label this chance as ‘slim’ is because out screening process for borrowers at LenDenClub is incredibly thorough and has helped us maintain an average default rate of just 3%-4%. At the same time, investors are also prevented from investing a large amount with a single borrower, enabling them to spread their risk. These features, combined with the AI capabilities of LenDenClub’s platform have enabled our investors to earn an average interest rate of up to 12% per annum.
Mutual funds have also emerged as a good investment alternative to FDs and P2P lending if you don’t mind dealing with market volatality. This is because, for many investors, mutual funds offer the right risk-reward balance. Mutual funds use the investors’ money to further invest in the stock market and debt-oriented investment instruments. Due to this, mutual funds are relatively riskier than FD but less risky than making direct investments in the stock market.
Because of the increased risk, mutual funds can deliver better returns than bank and corporate FDs. While top debt funds have brought in about 8%-9% returns in the last five years, riskier options have delivered 20%+ returns in the past five years for many investors. Some mutual funds have delivered 20%+ returns in one year as well.
Since these are managed by professional fund managers and are generally diversified, mutual funds aren’t all that risky but they are prone to market fluctuations. In general, mutual funds are a good alternative to FD for ambitious investors with a higher risk appetite and the ability to hold money in the market for a long time.
RBI Guidelines You Must Check Prior to Initiating the FD Renewal Process
In many cases, it has been observed that investors tend to forget the renewal date for their FD and leave their money with the bank for a long time even after maturity. In view of this, the RBI has recently announced that if the money is left with the bank after maturity, the additional interest paid will either be equivalent to the savings account interest rates or to the contracted rate at the beginning of the FD, whichever is lower.
Similarly, customers must also be aware of the auto-renewal terms offered by their bank. If over time, FD interest rates fall, you as an investor may suffer if you choose the auto-renewal option.
Fixed deposits continue to be a trusted form of investment. However, nowadays, investors are looking for better investment avenues as inflation rates catch up with the current FD rates floating in the market. While there are other relatively safe options available, such as debt mutual funds, the returns can be volatile, which may discourage investment from conservative and defensive investors.
If you are interested in higher-than-FD return rates and less volatile-than-stock investment options, peer-to-peer investments may interest you. With peer-to-peer investments, you assume the role of a lender and earn interest on your investment. Investors on LenDenClub also have to spread their investments across opportunities. This minimises their risk and improves their investment’s potential to earn more interest. Some users have made up to 12% interest on their investment. Download the LenDenClub app to find out more about how peer-to-peer investments work and what makes them such an interesting investment opportunity.