When discussing a ‘safe’ investment, most Indians often turn to fixed deposits (FDs). The reasons are pretty simple. Fixed deposits offer security and negligible risk.
While FDs offer stability, their returns might not be the best. Sometimes, FD returns don’t even beat inflation. That’s where people look for alternatives. And why not? It is wise to re-evaluate your investment strategy to earn better returns.
1. Corporate Bonds
A corporate bond is a financial instrument that serves as a loan to corporations by investors. These funds meet the company’s business requirements, ranging from a plant acquisition to expansion. In return, investors are paid fixed returns for a predetermined tenure.
Advantages Of Corporate Bonds
- High Returns: It provides higher returns than FDs. Investors can explore investment-grade options, giving up to 13% pre-tax yield on Grip Invest.
- Hedge Against Inflation: Unlike fixed deposits, returns from corporate bonds may offer protection against inflation.
- Regular Fixed Income: Corporate bond investments in India pay periodic interest, offering stable passive income.
- Diversification And Variety Of Options: Investors can diversify their portfolio with corporate bonds across multiple tenures, issuers, ratings, and yields.
Limitations Of Corporate Bonds
- Credit Risk: There is a risk of default by the issuer. Non-investment-grade and unlisted bonds often carry higher default risk.
- Liquidity Concerns: Selling corporate bonds in the secondary market can be challenging sometimes due to a lack of liquidity.
- Complexity In Selection: Choosing individual corporate bonds requires careful analysis of issuers and ratings.
2. Mutual Funds
A mutual fund is an investment company that pools money from many investors to invest in stocks, bonds, and other investment options. A professional fund manager manages it. The AUM of the Indian mutual fund industry has witnessed a 5-fold increase in the past decade.
Advantages Of Mutual Funds
- Higher Returns Than FDs: Mutual funds (especially equity funds) can provide better returns than FDs over the long term.
- Professional Management: Fund managers actively manage the portfolios of mutual funds. They readjust it to the changing market conditions.
- Diversification: Mutual funds spread investments across various sectors. It helps to reduce the risk of the portfolio.
- No Withdrawal Restrictions: Withdrawals before maturity might face penalties in FDs. On the other hand, there is no such restriction in mutual funds. You can sell any number of units as per your requirements.
Limitations Of Mutual Funds
- Market Risk: Returns in mutual funds are subject to market fluctuations. On the other hand, FD provides fixed returns regardless of market volatility.
- Costs: Mutual funds may have management fees and involve an expense ratio. There are no costs associated with FDs apart from penalties in case of early withdrawal.
- Lack Of Control: Investors have limited control over securities, bonds, and other investments selected within the fund’s portfolio.
3. Securitised Debt Instruments (SDIs)
SDIs are formed by pooling several underlying assets into an interest-bearing security. The underlying assets can be loans, lease agreements, invoices, etc. It is an emerging alternative fixed-income opportunity in India for retail investors. Grip Invest offers a variety of SDIs like BondX, LeaseX, LoanX, and InvoiceX.
Advantages Of SDIs
- Higher Returns Than FDs: Investors can easily generate up to 16% IRR by investing in SDIs.
- Fixed Non-Market Linked Returns: The returns are fixed and are not subject to market ups and downs.
- Diversification: Investors can invest in a pool of underlying assets that is further diversified across categories; for example, BondX is a collection of many investment-grade rated bonds from a curated set of issuers.
- Security Cover: Most SDIs involve security measures in the form of over-collateratisation, cash collateral, excess interest spread (EIS) etc., to cover the credit default risk.
Limitations Of SDIs
Default Risk- There is a risk of default on payments by the originator.
- Low Liquidity- Selling SDIs in the secondary market is challenging.
- Complexity- The structure of SDIs can be complicated to understand for individual investors. Here, online investment platforms are essential in due diligence and assisting investors.
4. Fractional Commercial Real Estate (CRE)
Fractional CRE investment allows investors to own a part of the commercial property and receive fixed returns in proportion to their investment. These investments are usually made in Grade A properties like office spaces, shopping malls, etc.
Advantages Of Fractional CRE
- Low Entry Costs: Investors can participate in fractional CRE with a lower initial investment. It can start from as low as INR 1 lakh.
- High Stable Income: Generates a consistent stream of rental income from tenants, yielding up to 12% yield.
- Professional Management: Investors are relieved of day-to-day management. Fractional CRE often come with professional property management.
- Potential Capital Appreciation: Property values can increase over time, leading to capital gains.
Limitations Of Fractional CRE
- Limited Control: Fractional investors have limited control over decision-making related to the property.
- Default Risk: This investment is subject to default on rental payments.
- Fees And Costs: Certain costs may be associated with fractional ownership platforms. It can include management fees, transaction costs, etc.
5. Public Provident Fund (PPF)
PPF is a government-backed long-term investment option for risk-averse investors to earn fixed interest rates decided every quarter by the Finance Ministry. The minimum tenure of a PPF account is 15 years, extendable in blocks for five years after that.
Advantages Of PPF
- Tax Saving: PPF qualifies for an exempt-exempt-exempt (EEE) scheme where the amount invested, the interest received, and the maturity amount is tax exempt. The tax deductions are available for a maximum amount of INR 1.5 lakhs per year under Section 80C of the Income Tax Act.
- Flexible Investment Frequency: The deposit can be made in a lump sum or instalments without restriction on the number of instalments per financial year.
- Partial Withdrawal: The PPF amount can be partially withdrawn from the seventh financial year.
Limitations Of PPF
- Lock-In Period: PPF has a minimum lock-in period of 15 years.
- Fixed Interest Rates: PPF is a fixed return scheme and may not generate the highest returns in the growing economy.
Conclusion
In the constantly evolving economic landscape, investing only in fixed deposits is insufficient to beat inflation and build wealth. Therefore, exploring higher-paying, predictable alternatives to fixed deposits is necessary. Also, an investor should diversify in various investment avenues like FDs, corporate bonds, SDIs, fractional real estate, PPF, etc, while building their investment portfolio.
Frequently Asked Questions
1. What is an expense ratio?
It is the fees charged for maintenance by mutual funds. This number depends on the size of the fund.
2. Can investors withdraw investment in SDIs before maturity?
SDIs are tradable instruments in the secondary market and can be traded before maturity. However, liquidity may be an issue.
3. Can I invest in corporate bonds through the exchange?
Yes! With RFQ integration on OBPPs like Grip Invest, you can easily place an order via exchange.
4. Why choose debt mutual funds over FDs?
Debt funds often offer higher post-tax returns and better liquidity than fixed deposits. They also bring the diversification benefit as your money is not invested in only one bond.
5. How can I get better interest from small finance banks?
Small finance banks offer higher FD rates than big banks, but check deposit insurance before investing. If an FD is DICGC insured, like corporate FDs available on Grip Invest, then it comes with a layer of security.
6. What’s good about Treasury bills compared to fixed deposits?
T-bills are risk-free government securities with short maturities, making them safer than FDs.
7. Why do people consider P2P lending despite the risks?
P2P lending offers higher returns than FDs, though risks are higher due to borrower defaults. It is also important that the platform you choose for P2P lending is authentic and it follows the RBI guidelines.
8. How does investing in gold protect my money better than FDs?
Gold hedges against inflation and currenc
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