5 Investment Options that Earn Better than Bank FD Returns

Fixed deposits have been the pillars of guaranteed investments since generations in India. However, in today’s diverse financial landscape, market dynamics and individual financial goals have undergone a major shift.

Now, exploring alternatives to traditional fixed deposits has become increasingly crucial for individuals seeking higher returns and diversification. While fixed deposits certainly offer stability, there are alternatives that potentially yield superior results.

Let’s explore these diverse investment options to make informed financial decisions on investing, that are better aligned with our goals, risk appetite and yield good returns.

1. Mutual Funds

“Mutual Funds Sahi Hai!” With that punchline reaching every household, mutual funds have emerged as a top alternative to fixed deposits owing to their potential of generating higher returns.

Here are the main features and benefits of mutual funds:

• Mutual Funds offer investors a diversified and professionally managed avenue for wealth growth and have thus emerged as a crucial part of a well-balanced portfolio.
• They pool capital from various investors and invest across a diversified portfolio of stocks, bonds, or other securities depending on the kind of fund. This diversification helps spread risk, thus mitigating the impact of market fluctuation, an advantage above directly investing in stock market.
• Investors can choose from equity, debt, or hybrid mutual funds based on their risk tolerance and financial objectives. They are managed by experienced fund managers who employ market expertise to optimize returns.
• You can invest in mutual funds as a lumpsum or as monthly investments in the form of SIP - systematic investment plan. SIPs provide the added advantage of a disciplined investment approach and hedging, thus reducing the impact of market volatility through rupee-cost averaging.

2. National Pension Scheme (NPS)

The National Pension Scheme, commonly known as NPS is also a noteworthy alternative to fixed deposits, especially for individuals planning for retirement with a long-term perspective.

Governed by the Pension Fund Regulatory and Development Authority (PFRDA), NPS is a voluntary, long-term retirement savings scheme designed to provide financial security during one's retirement years.

The main features and benefits of NPS are:

• NPS offers a diversified investment portfolio and the flexibility to optimise your portfolio across various asset classes comprising equity, corporate bonds, and government funds, allowing individuals to choose their asset allocation based on risk appetite.
• NPS is based on a unique identification number called PRAN (Permanent Retirement Account Number) which is allotted to every investor and remains constant irrespective of any change across employment, city etc.
• There are two types of NPS accounts:
  • TIER 1: Also known as pension account, the deposits in this account fall under tax exemption and the withdrawals are restricted. 
  • TIER 2: Any additional amount that you wish to invest with flexibility can be deposited in this account. You can withdraw your corpus anytime from this account. However, it does not provide any tax benefit.
• One of the most attractive features that NPS offers is its tax advantage. Contributions up to Rs.50000/- are eligible for tax deductions under Section 80CCD. This benefit is over and above the limit of Rs.1,50,000/- under section 80C. However, this benefit is available in only TIER 1 type of account.

3. Corporate Fixed Deposits

Corporate Fixed Deposits are just the regular fixed deposits with the only difference that they are not provided by banks but by NBFCs and other financial institutions.

Thus, corporate fixed deposits are term deposits where an investor deposits a lump sum amount for a fixed period at a fixed interest rate, with a corporate entity.

Here are the main features and benefits of corporate FDs:

• Unlike traditional bank FDs, corporate fixed deposits often yield higher returns as compared to bank FDs, making them attractive to investors in search of enhanced income. This small difference of interest rate can make a significant impact on your returns.
• You can use corporate FDs for your short-term financial goals as they have a comparatively lower lock in as compared to bank FDs.
• Similar to the bank FDs, the corporate FDs can also be used as a collateral to avail loans.
• It's crucial to note that corporate fixed deposits are not covered by DICGC (the deposit insurance up to 5 lakhs, backed by government). Hence, they carry an element of risk. Ensure to duly check the fundamentals and the credit rating of the issuing company.
• The interest earned on corporate FDs is added to your taxable income and taxed as per your tax slab. If the interest earned on corporate FDs exceeds Rs.5000/-, TDS is deducted, as per the Income Tax Act.

4. Gold

Gold has been the safest haven in the world of reliable investments and has stood the test of time since ages. For investing in gold, investors can opt for physical gold in the form of coins or bars or choose more accessible avenues like gold exchange-traded funds (ETFs) and sovereign gold bonds.

The main features and benefits of gold investment are:

• Historically, gold has been in an inverse relationship with the equity market. During times of market downturns, people turn to investing in gold and when the market performs, investors divert their funds to the market.
• Thus, gold offers a hedge against market volatility and economic uncertainties. It can be easily called an insurance against market volatility and can contribute to portfolio resilience.
• Another key attraction of gold is its ability to act as a store of value and a hedge against inflation. The precious metal tends to maintain its worth over time, providing a sense of stability and appreciation.
• Gold holds a high cultural significance in India, with festivals and weddings driving demand for it.
• While physical gold ownership involves storage and security considerations, along with making charges etc., financial instruments like gold ETFs offer a convenient and cost-effective way to gain exposure to gold prices without the need for physical possession.
• Gold Investment can be done in the form of physical gold, gold ETFs (exchange traded funds), gold mutual funds and sovereign gold bonds.
• The basic criteria that any investor looks for are safety, liquidity and profitability. Gold investment ticks all these. It has proved to be an inflation beating instrument, a stable one during economic downturns and provides excellent liquidity to the investors.
• Returns from gold sale within 36 months are termed as short-term capital gains and beyond that are long term capital gains. In case of physical and paper gold, the LTCG is taxed at 20.8% and STCG is taxed as per your income tax slab.
• In case of gifted or inherited gold, from immediate relatives, its tax free. However, any gold received from non-relatives beyond the value of Rs. 50,000/- is taxable and considered income from other sources.

5. Bonds

For conservative investors, seeking stable income streams and capital preservation, bonds are a good option. Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. In simple terms, these are loans taken by a company from the investors.

Some of the important features and benefits of bonds are:

• These fixed-income instruments pay periodic interest to bondholders, as a percentage of the face value, on predetermined intervals. On maturity, the principal amount is returned.
• Bonds are known for their relatively lower risk compared to equities, making them an essential component of a diversified and balanced investment strategy.
• The different types of bonds are corporate bonds issued by companies, sovereign bonds issued by national government and municipal bonds issued by local government.
• Government bonds are considered low risk as they are backed by the government's credit, offering a secure investment with predictable returns. Corporate bonds, on the other hand, involve slightly higher risk but come with higher potential yields.
• In times of economic uncertainty, bonds often serve as a safe haven, offering a reliable income source and preserving capital. Investors can choose from various bond types based on their risk tolerance and investment goals.
• Bonds are taxable. The interest earned from bonds is added to the taxable income. However, the capital gains are taxed as per their holding period. If the holding period is less than 12 months, the capital gains are termed short term capital gains (STCG) and beyond 12 months, they are called long term capital gains (LTCG).  STCG are taxed as per the applicable income tax slab while the LTCG are taxed at the rate of 10% without indexation.

While fixed deposits remain a traditional choice among conservative investors, exploring diverse investment options can offer superior returns and financial flexibility as per one’s risk appetite and financial goals. Mutual funds, NPS, Corporate FDs, Gold and Investment bonds are a few investment avenues that can prove to be a better option than the regular fixed deposits, by diversifying and optimising your portfolio for long term corpus growth and stability.