Investing in fixed deposits has been long considered to be a safe investment avenue. Many risk averse individuals and seniors are opting for investing their hard earned money in fixed deposits to make decent returns from their investment without worrying about the uncertainty of the equity markets. The returns on fixed deposits however depend on the interest rates offered by the bank which is fluctuating in nature according to market trends.
With rising inflation the returns on fixed deposits have become quite unattractive in the recent months. With SBIs recent announcement of rate cut which was followed by the savings account rate cuts by Indusind bank and Kotak bank, new investors are thinking twice before investing in FDs. The gaining popularity of other debt instruments also started becoming a threat to fixed deposits now.
While there is no doubt that fixed deposit which is a traditional investment still has a stronghold and other benefits, there are various other instruments today that an investor can explore keeping the safety of assured return intact while gaining higher interests. Investing in debt instruments is a good idea for the conservative investor today as debt financial instruments offer higher interest rates and safety.
Understanding Debt Funds: Debt funds are mutual funds that invest in assets offering fixed and assured income. Debt funds usually invest in state and central government backed financial instruments including treasury bills, government securities and high credit rating corporate non-convertible debentures (NCDs). While an investor has the option of investing directly in such instruments, since debt funds are managed by professional fund managers, the chances of an overall return over the years is higher with than investing individually in various government backed financial instruments independently.
Fixed Maturity Plans (FMPs): Fixed maturity plans are close ended debt mutual funds with maturity dates from one year to five years. While fixed deposits offer a fixed return at the end of the maturity period, fixed maturity plans only have a fixed maturity date. The reruns of fixed maturity plans are connected with the market instruments and their returns depend on the overall economic parameters. Being debt oriented funds they offer an additional advantage of in terms or short term or long term capital gains.
FMP’s Vs Fixed Deposits: In order to understand the difference in terms of returns for the same investment amount done in fixed deposit and fixed maturity plan, let us consider the following example. Suppose an investor invested an initial investment of Rs. 50000/- in both a fixed deposit and a fixed maturity plan. The net return on FMP using the benefit of indexation is higher even if the fixed deposits interest rates are similar to the FMP. With interest rates for fixed deposits falling well below 9% especially for short tenure investments, opting in fixed maturity plans is a better investment decision today.
| Instrument | Fixed Deposit | FMP (Dividend Option) | FMP (With Indexation) |
| Returns | 10% | 10% | 10% |
| Tax | 33% | 14.2% | 20% |
| Pre Tax Returns | 5000 | 5000 | 5000 |
| Tax Applicable | 1650 | 710 | 1000 |
| Net Return | 3350 | 4290 | 4000 |
Investment options worth considering for the common investor: Other popular debt investment instruments that can be considered by the low risk bearing investors include:
Non Convertible Debentures: Non Convertible Debentures, commonly known as NCDs are debt financial instruments issued by various companies to raise money for business. Unlike other convertible debentures, NCDs are not allowed to be converted into equity shares of the company and have a fixed tenure. While the rate of return for NCDs depend on the market conditions, on an average NCDs offer better interest rates than fixed deposits.
Another advantage NCDs have over conventional fixed deposits is the TDS benefit. While bank fixed deposits and company fixed deposits both are subjected to TDS, NCDs do not warrant for any tax deduction as it comes under Section 193 of the income tax act. Since almost all NCDs today are issued in dematerialized form, there is no TDs obligation on them. NCDS can be sold at stock exchange allowing the investor the option of premature exit in case of any financial emergency.
IFCI Public Issue: Government owned non banking financial company Industrial Finance Corporation of India offers a great investment opportunity for the low risk investors. IFCI Ltd has recently opened a public issue of non-convertible debentures to seek up to Rs. 2,000 crore from the market. The public issue of non-convertible debentures is available for subscription till November 21 offering investors secured redeemable non-convertible debentures. IFCI is offering debentures for three tenure periods including 5 years, 7 years and 10 years offering interest rate of 9.9 per cent per annum for institutional investors and 10 per cent for individuals.