Investment options other than fixed deposits

Thinking outside the box is very important to excel in life. If Nicolas Tesla, Marie Curie, the Wright brothers, and other similar personalities had not thought out of the box, the world would have been a much different place today.

Fixed deposits have been the comfort zone for most Indians when it comes to investments. However, with limited scope for growth, they may not be adequate to meet the demands of a changing world.

So, here are some other out-of-the-box investment options that may be better than a fixed deposit.

First, let’s understand the nature of fixed deposits and its tax implications

Fixed deposits are a low-risk investment option where your capital stays safe, and returns are guaranteed. However, they pose some significant problems. The first is their return rate. Fixed deposit returns may not be enough to counter inflation. Secondly, FDs are not always tax-efficient. While you can claim a tax deduction under Section 80C of the Income Tax Act, 1961 for 5-year FDs, the interest is taxable according to your tax slab in all cases. The higher your income, the higher the taxes. These further lower your profit, affecting your returns in the face of rising prices.

Additionally, fixed deposits provide low liquidity. If you withdraw your money before maturity, you risk paying the penalty.

Thankfully, there are other instruments that can be more effective than fixed deposits.

Alternatives to fixed deposits

• Passive funds: 

  Passive funds are a type of mutual fund that tracks a market index. Unlike active mutual funds, they do not adjust their portfolios frequently and are hence low-cost investments. The fund manager mimics the composition of the index, and the fund earns profits in tandem with the benchmark. While passive funds carry some risk, they may be effective to counter inflation and are hence a good substitute for fixed deposits. 

• Tax saver mutual fund (ELSS): 

  Equity-Linked Savings Schemes (ELSS) are the only mutual funds that offer a tax deduction under Section 80C of the Income Tax Act, 1961. They primarily invest in equity and equity-linked securities and can provide capital appreciation over the long term. They also have a lock-in period of three years. ELSS may be the most effective as a long-term investment and can deliver higher returns than fixed deposits over a long investment horizon.

• Liquid mutual funds: 

  Liquid funds are a type of debt mutual fund that invests in debt and money market securities with a maturity of up to 91 days. High liquidity is one of the greatest advantages of mutual fundslike these over fixed deposits. While fixed deposits have strict penalties over premature withdrawals, liquid funds, as the name suggests, offer quick redemptions for any immediate financial need and can be used as a low-risk, short-term investment.

• Money market funds:

  Money market funds are another type of debt funds. They invest in money market instruments that have a maturity of up to one year. They carry low risk, especially if you stay invested for more than six months. 

Conclusion

There are several options that may have an edge over fixed deposits depending on your risk appetite. Hence, evaluating your financial goals and investing per your risk appetite is necessary. Poor research can lead to stress at a later stage. So, make sure to compare all options and pick one after careful assessment.

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