Falling FD Rates: Risk-Free Investment Options For Long Term Investors

By Adhil Shetty | January 5, 2018

With falling rate of return from bank Fixed Deposits, here’s a list of alternative investment options to bank Fixed Deposits. 

Post demonetization, banks were flushed with old 500 and 1000 rupee notes, and more and more people opted for keeping money in the bank. In lieu of this, banks ended up lowering the interest offered on both savings bank accounts and Fixed Deposits (FD).

FDs have been rather popular as a savings instrument in India, mainly because of the attractive interest rates they offered. Interest earned on FDs have come down, and range between 5 to 7% a year today. Additionally, the interest earned is taxed as per your tax bracket and TDS is applicable on any interest greater than Rs 10,000 a year. Your actual return after taxation may be as low as 5% or even lesser.

To park your funds in better schemes, we tell you some alternative long-term investments you can consider instead of the traditional FD.

Public Provident Funds

Public Provident Fund, popularly called PPF is a good alternate option. The amount you invest is eligible for Rs 1.5 Lakh tax deduction, under Section 80C and the investment has a tenure period of 15 years.

The Government did lower PPF interest rates by 20 basis points a few days back to 7.6% for the January-March quarter, compared to earlier rates being as high as 9% in past years. Despite this PPF is still a better investment than FD as it offers higher interest and enjoys the EEE benefit where the amount withdrawn at maturity is tax-free.

Liquid & Short Term Debt Funds

Some varieties of debt Mutual Funds may provide you marginally better returns than FDs. Debt funds include a mix of treasury bills, Government securities, corporate bonds, money market instruments and other debt securities of different time horizons. This is another great option if you are looking at short to mid-term investments.

In the long run, debt funds are more tax-efficient than fixed deposits. This is because when you invest in debt funds for 36 months or more, your gains are called Long Term Capital Gains (LTCG), which are taxed at 20% with the indexation benefit, which allows you to inflate the purchase price of the debt fund using cost inflation index (CII). This reduces your overall tax incidence since you don’t have to pay a flat tax rate as per your slab.

National Savings Certificate

National Savings Certificate (NSC) is an investment scheme offered by the Government of India that offers guaranteed income as the money invested is safe. You also enjoy tax deduction on investments under Section 80C, up to Rs 1.5 lakh a year. NSC has a maturity period of 5 years.

In terms of returns, NSC gives you an annual rate of 7.6%, which is higher than most Fixed Deposit rates. The interest earned is reinvested and also qualifies for the tax deduction and only the interest earned in the last year is added to your taxable income. You thus enjoy higher post-tax returns than fixed deposits.

Post Office Monthly Income Scheme

If you are looking for guaranteed returns, invest in the Post Office Monthly Income Scheme popularly called POMIS. You get an interest of 7.5% a year, payable each month. POMIS has a maturity of 5 years. You can invest a maximum of Rs 4.5 lakh a year. However, POMIS does not offer any tax benefits and the monthly income payout is taxed.

POMIS nonetheless offers higher interest than fixed deposits and come with a sovereign guarantee and are very good for risk-averse senior citizens.

Company Fixed Deposits

Companies offer fixed deposits to investors called company Fixed Deposits, to collect money for working capital and business needs. Interest offered is generally 1-2% higher than fixed deposits of a similar tenure. Keep in mind though that company fixed deposits are risky compared to bank Fixed Deposits.

If the company goes through bad times, there’s a chance of a default. To be on the safer side Invest only in AAA rated company deposits as these offer the highest safety on deposits. Company deposits also have an option to pay interest at monthly or quarterly intervals.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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