Better Investment Than Fixed Deposit | Alternatives to Fixed Deposits

As an investor, it is very important to build a diversified portfolio with exposure to both equity and fixed-income instruments. And when it comes to fixed-income instruments, traditionally the most popular option is FD (Fixed Deposit). The biggest advantage with FD is a fixed interest rate. So you know that by the end of the year you will get a fixed amount of interest. That gives you peace of mind. However, of late the interest rates on FD have reduced drastically. Today the interest rates on FD with top nationalized banks are in the range of 6% and that's where I have been asked this question multiple times. What are the alternatives to FD? In this article, I'm going to discuss 3 alternatives to FD that gives a guaranteed return. Now there are multiple debt mutual funds available in the market but the problem is the returns are not fixed. And when you're looking for an alternative to an FD, the idea is to invest in instruments that offer fixed returns and instruments that are as safe as FD with a top nationalized bank. So I have identified 5 options that offer a guaranteed return, and are as safe as an FD or even safer than FD. All right, now let's get started.

Better Investment Than Fixed Deposit
Source by Google

#G-Sec

1st alternative of FD with the guaranteed return is G-sac( Government Security). Now let's try to understand; What exactly is G-Sec? What are the expected returns? What are taxability and variations? And how you can invest in them? 

What exactly is G-Sec?

So G-Sec as the name suggests is offered by the Indian government. It is offered by the Indian government. It is a bond that the government offer against a fixed interest rate every year. Now, there are two key terminologies that you should be aware of...

Government Bonds with a duration greater than one year are called G-Sec, and with a duration less than one year are called T-bills (Treasury Bills). As far as interest rates are concerned, the interest rates on G-Sec and T-bills are not fixed. It means it would depend upon the individual bonds. There are 2-major factors that decide the interest rates on G-Sec. 

1. Duration

The first factor is duration, As the duration of the bond increases, the interest rate increases. For example, there are G-Sec bonds with duration like 2-year, 5-year, 7-year, 10-year up to 40 years. yes, you can invest in G-Sec bonds with a duration of up to 40 years, where you get fixed interest every year. So higher the duration higher would be the interest rate. It is up to you to decide what duration you want to invest for and accordingly you will face the interest rate. 

2. Overall Interest Rate Scenario.

The second factor that decides the interest rate on G-Sec is the overall interest rate scenario in the economy. For example, currently, G-Sec bonds are available at an interest rate of 7% -7.5% depending upon the duration. Now that is a very good interest rate better than FD, which is currently offering an interest rate in the range of 6%. 

What are the expected returns?

Please note that once you buy the  G-Sec bond at a specific interest rate, your interest rate gets locked in. For example, if you invest in a 5-year  G-Sec bond with let's say a 7.2% interest rate, then you will continue to fetch 7.2% interest every year for the next 5 years. Not only the  G-Sec bond interest is higher than FD but there is also a sovereign guarantee because G-Sec bonds are offered by the Indian government, which means G-Sec bonds even safer than FD, so you have a peaceful sleep. 

Taxability and Variations

Although as far as taxation is concerned, interest earned on  G-Sec is considered income from other sources. Bonds can be of various types such as fixed-rate bonds, floating-rate bonds, zero-interest-rate bonds, and inflation-linked bonds, including short-term and long-term maturity options. 

Long-Term Capital Gain (LTCG)

These bonds can give better returns than traditional bank FDs. However, capital gains arising from such bonds are taxable.

Short-Term capital gains (STCG)

Tax is applicable on an income tax slab basis, in case of redemption before the completion of 3 years. Otherwise, if you hold it for more than 3 years, at the time of maturity or withdrawal, 20% of the long-term capital gains (LTCG) tax will be applicable along with the indexation benefit.

How to invest or exit from the G-Sec bonds?

You can invest in G-Sec Bonds through any trading platform, you just need to check their brokerage platform and they should have the option to invest in G-Sec Bond. For example, ZERODHA offers this option of investment on its Coin platform. Then there's a platform called RBI retail direct offered by the Reserve Bank of India, it allows you to invest directly in Central Government Bonds, State Government Bonds, Treasury bills, as well as Sovereign Gold Bonds. It is a completely free platform. So there is no cost like brokerage fee etc. There is Only a payment gateway fee. So you can also consider creating a separate account on RBA detail direct. Even, if you do not have a Demat account, you can still invest in such mutual funds that primarily invest in G-secs, T-bills, etc. One thing that you should know is you can't invest in any bond at any time. These G-Sec bonds and T-bills have a specific bidding window. So different G-Sec and T-bills will be available on the different trading windows, you can check the calendar to get the list of various G-Sec and T-bills of different duration and their bidding window period. And you can always exit your bonds even before maturity by selling them on the secondary market. Considering the fact that currently, the interest rates on G-Sec bond is on the high side, it is a good time to invest in them. 


#Corporate Bonds

2nd alternative is top-rated corporate bonds. Just like government bonds, many corporate houses raise money via bonds and they offer a fixed interest rate against those bonds. This money is being raised for multiple reasons like an expansion of manufacturing capacity, mergers or acquisitions, business expansion, etc. Again, the interest rate on these corporate bonds would vary from company to company. Now, here you need to understand one very important point before investing in corporate bonds, and that is credit rating. Each company that offers the corporate bond has a credit rating associated with it, for example, one of the credit rating agencies is CRISIL and it has highlighted a list of corporate ratings for short-term as well as long-term loans. So AAA-rated corporate houses signify the highest safety that shows companies are financially strong and as a very good history of debt repayment. Likewise, AA-rating would show high safety, and A-rating would show adequate safety. And as the rating fall, the safety reduces. For example, a company with a credit rating of C or D means there is a high chance of default. Obviously, you don't want to buy bonds from such companies. Similarly, there are other credit rating agencies like ICRA,  CARE, etc with their own rating scale.

What are the expected returns?

Now, the interesting part is that the interest rate on corporate bonds is directly linked with the credit rating of the company. It means if a company has a higher credit rating, then it will offer a lower interest rate, and a company with a lower credit rating will offer a higher interest rate, and that is where it gets very tricky. It's very tempting to invest in a corporate bond that offers a 10%-12% interest rate, but that comes with higher risk; As such higher interest rates are offered by companies with lower credit ratings, and corporates with AAA or AA ratings would have lower interest rates in the range of 7%-8%, that's we need to be very careful with our investment. Ideally, you should only consider top-rated corporate bonds with AAA or AA ratings or at max go for A-rated bonds because below that the default risk increases and you don't want to take this risk for an additional 1%-2% interest rate.

Taxability and Variations

Now if you look at the taxation part, interest earned from these corporate bonds is taxed as per your income tax slab. However, if there's an appreciation in the bond price, it will be taxed as per short-term capital gain or long-term capital gain similar to G-Sec bonds.

How to invest or exit from Corporate bonds?

As far as investment platforms are concerned. Many brokerage firms provide the option to buy these corporate bonds. Alright, there are platforms like GoldenPIe or Wint wealth that help you invest in these corporate bonds. Corporate bonds are 100% tradable securities, which means that there's no lock-in period on your investment. If you want to sell them before maturity, you can do so in the secondary market. (market price may vary from par-value).


#RBI Floating Rate Saving Bonds(FRSB)

3rd alternative of FDs is Floating Rate Saving bonds (FRSB), as the name suggests, these bonds are issued by RBI on behalf of the Government of India; these bonds have a fixed coupon rate that remains unchanged until maturity but these bonds have a floating interest rate. 

What are the expected returns?

If you invest in RBI FRSB, keep in mind that the interest rate will change periodically. That's because the coupon rate on these bonds fluctuate based on the interest rate of its benchmark, which is the National Savings Certificate, the interest rate for RBI saving bond is 35 basis point above the NSE rate, as of today, the NSE rate is 6.8%, so, the rate on RBI floating rate bond will be (6.8% + 0.35%) 7.15%. It means if you invest in RBI FRSB, you will fetch a guaranteed 7.15% interest rate today. Again, this interest rate is much better than the current FD rate and there is also a sovereign guarantee. However, this interest rate is floating and would be reviewed periodically every 6 months and can change depending upon the NSE rate. So, if the NSE interest rate increases, RBI FRSB interest will also increase, and if the NSE interest rate falls RBI FRSB rate will also fall. Currently, for the period between July 1, 2022, to December 31, 2022, the interest rate remains unchanged at 7.15%. 

As far as investment duration is concerned, these floating-rate saving bonds from RBI have a locking period of 7 years. However, there is some relaxation for senior citizens, you can choose to offer interest payment by the end of the investment duration which is 7 years or interest can be paid on a semi-annually basis. 

How to invest in RBI FRSB?

You have multiple options to invest, you can invest via both offline and online platforms of public sector banks (SBI Bank, Bank of Baroda, etc), as well as private sector banks (ICICI Bank, HDFC Bank, etc). For example, at ICICI bank, there is an option to invest directly in RBI FRSB via its website as well as the app. You can check with your respective bank on how to invest in RBI FRSB.

Taxability and Variations

Although, the taxation on these bonds is again as per your income tax slab, which is similar to FD. 


#National Savings Certificate (NSE)

4th alternative is National Saving Certificate, which is a Government-issued fixed-interest saving bond that offers guaranteed interest and complete capital protection. It comes with a fixed maturity period of 5 years,, and you are not allowed to exit before maturity. However, you are free to take loans against NSCs under certain conditions. There is no maximum limit on the purchase of NSCs but only an investment of up to Rs 1.5 lakh can get tax exemption under section 80C of the income tax act. 

What are the expected returns?

If you looking safe investment avenue to save taxes by earning a steady income, you can opt for this scheme, NSC is a risk-free fixed, interest-saving option that offers an attractive rate of interest currently somewhere around 6.8%.

Taxability and Variations

Investment of up to Rs 1.5 Lakh in National Saving Certificate will annual tax rebate under section 80C furthermore the interest earned on the certificates is also added back to the initial investment and qualifies for a tax break.

How to invest or exit in NSE?

National Saving Certificate, which you can open at the post office in your name, or for a minor (below than 10 years) with another adult as a joint account; is a savings bond that encourages subscribers maybe small to mid-income investors to invest while saving on income tax. 

As we know NSC comes with a fixed maturity period of 5 years, and you are not allowed to exit before maturity, except under certain conditions, such as; On the death of the account holder in a single account or any or all account holders in a joint account, on the case of forfeiture of pledgee National Savings Certificate, or on order by the court.


#Public Provident Fund (PPF)

5th alternative is the Public Provident Fund,  a long-term saving-cum-investment scheme that offers an attractive rate of interest and returns on the amount invested annually. An investor can invest in PPF Scheme annually with a minimum of Rs 500 and a maximum of Rs 1.5 lakh, this investment can be undertaken on a lumpsum or installment basis; However, an individual is eligible for only 12 installment payments into a PPF account yearly. PPF account has a lock-in period of 15 years, before which funds can't be withdrawn completely. An investor can extend their tenure in blocks of 5 years after the lock-in period is over if required. One has to invest in the PPF account every year to ensure that the account remains active.  

What are the expected returns?

If you are looking for a safe investment avenue to earn a steady income, you can invest in this scheme, Public Provident Fund is a risk-free, interest-saving option that currently offers an attractive interest rate of around 7.1% rate. The Finance Ministry fixes the interest rate for PPF every year, which is paid on March 31. Interest is calculated on the minimum balance between the close of the fifth day and the last day of every month.

Taxability and Variations

PPF scheme comes under the Exempt-Exempt-Exempt (EEE) category, which means all deposits made in PPF are deductible under section 80C of the Income Tax Act. The maximum contribution to PPF cannot exceed Rs 1.5 lakh in a financial year. In addition, the accumulated amount and interest are also exempt from tax at the time of withdrawal. PPF account cannot be closed before maturity but the nominee can file for closure of the account only in case of death of the account holder.

How to invest or Withdraw from PPF?

Any Indian citizen can open a PPF account either with the post office or any nationalized bank like Punjab National Bank or State Bank of India etc. These days, some private banks like ICICI, HDFC, and Axis Bank are also authorized for the PPF account facility.

PPF account has a lock-in period of 15 years, before which funds can't be withdrawn completely. Once the PPF account attains maturity, you can withdraw the entire maturity amount. However, in case of emergency, if you need money emergency, you can partially withdraw from the 7th year onwards. You can prematurely withdraw up to 50% of the total amount available in your account at the end of the 4th year. But, this facility can be availed only once.


Conclusion

Each investment option comes with its own pros and cons. It is difficult to say which is the best option for investment. It depends on various factors like investment horizon, risk appetite, age of the investor, etc., as your risk appetite and investment horizon affect your returns. Hence, you should choose the option as per your risk appetite and investment horizon. I am not saying that fixed deposits are a bad investment option, but the general rule of any investment is inflation, and your's tax-adjusted returns should not be less than inflation.

Disclaimer: These views are for educational purposes all these options should be properly analyzed before starting investments directly and a regular check is needed to ensure the validity of the information.

If you want to know more about investing, you can read this:

Post a Comment

0 Comments