Should We Search For Alternatives To Fds In 2018

Indians are known to have an affinity for bank FDs due to their fixed earnings and safety. But bank FDs are starting to face stiff competition from other options, some of which not only promise guaranteed returns, but also higher earnings.

Ensuring that your investment portfolio has some low-risk options is a must. But, redistributing your hard-earned cash to better schemes is essential for your financial growth.

Here are some alternatives to bank FDs that you can consider.

Public Provident Fund 

If you want accumulate wealth slowly and consistently, the PPF is a suitable long-term investment option. It is known for its safety, but also for its ease of operation. With just Rs.500, you can open a PPF account either in a post office or with any branch of State Bank of India, Bank of India, Central Bank of India, or Bank of Baroda.

You can deposit a maximum of Rs.1.5 lakh a year in your PPF, either in a lump sum or in instalments. This 15-year, government-backed instrument does not levy tax on the interest that you earn. You can also claim the deposit amount as a deduction under Section 80C.

PPF interest, currently at around 7.6%, is paid on the lowest balance between the 5th and the 30th of the month. You receive the compounded interest in your bank account every year on March 31.

Tax-Free Bonds 

Tax-exempt bonds are also a great alternative to bank fixed deposits. Public sector corporations and institutions such as Power Finance Corporation Ltd (PFC), Indian Railway Finance Corporation Ltd (IRFC), National Highways Authority Housing of India (NHAI), etc., generally issue tax-free bonds.

These high-safety instruments can only be bought as securities from stock exchanges. Also, they offer attractive interest rates also known as coupon yields that can go as high as over 8%.

Your money in tax-free bonds remains invested for long periods of 10, 15 or even 20 years. This makes them low-liquidity investments. As the name suggests, you don’t have to pay tax on the interest that you earn. Also, tax-free bonds offer annual payouts instead of monthly interest payments.

Company Fixed Deposits

Company fixed deposits are also an excellent choice for both capital protection and wealth appreciation purposes. Just like banks, many other financial institutions offer fixed deposits for you to invest in. Corporate FDs usually offer a higher rate of interest. So, while banks offer around 6%–6.5% interest on FDs, good company FDs will offer you up to 8.10% as interest.

They also have a flexible tenor that can be as low as six months or as high as several years. You can also opt for non-cumulative FD choosing a monthly, quarterly, half-yearly or annual payout. Consider investing in a company FD.

Their Fixed Deposit offers you the option between cumulative and non-cumulative interest and a flexible tenor. Besides, you get an interest rate of 7.85%, or 8.10% if you are a senior citizen. Also, this FD has an easy application process and high stability rating from CRISIL and ICRA.

Debt Mutual Funds

Debt mutual funds invest in instruments like corporate bonds, money market instruments, government securities, etc., to earn returns. These returns are neither fixed nor guaranteed.

Debt mutual funds have high liquidity, albeit with a small exit load. They usually give you earnings that are slightly above bank FD interest rates. The key difference between a bank fixed deposit and a debt mutual fund is that while interest on the former is fully taxable, debt mutual funds become beneficial when you invest for over three years. They are taxed at 20% after indexation.

Fixed Maturity Plans

Fixed maturity plans (FMPs) are similar to debt mutual funds in many respects. The main difference is that FMPs invest in instruments or securities whose duration matches exactly that of the plan. This means that a fixed maturity plan of 3 years will invest only in those instruments or securities that have a maturity of 3 years.

As FMPs have a lock-in period to reduce interest-rate risk and other liabilities, liquidity is very low. So, you should opt for FMPs that have tenors you are comfortable with. FMPs do not park their money in equities but mostly in Certificates of Deposit (CDs), Commercial Papers (CPs), money market instruments, and even corporate bonds.

So, if bank FDs are no longer giving you the returns that you desire, consider investing in these five instruments this year. Pick a mix of investment options that offer you the best interest rates, the highest security and the liquidity that you seek.

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