FDs are preferred by conservative investors as they are highly liquid, low-risk and offers safe return. However, a high exposure to fixed deposits over a long time will lower your return income.
One of the most popular investment instruments, fixed deposits (FDs) may not be such a good idea for meeting your long-term goals. FDs are preferred by conservative investors as they are highly liquid, low-risk and offers safe return. However, a high exposure to FDs over a long time will lower your return income. Beating inflation might become a challenge.
Your long-term financial goals may require a mix of different investment products to fetch adequate return. You need an assortment of instruments that are tax efficient, fetch higher return, and are capable of beating inflation so you earn a holistic return. FDs can be a useful long-term investment at a point when you have accumulated wealth and are in need of a safe avenue to park the money for your post-retirement life. If you are at an age wherein you have a slightly higher risk appetite, you can explore the following investment alternatives available in the market that can fetch better returns.
Public provident fund (PPF)
This is a long-term fixed return investment product that is eligible for tax benefits under Section 80C of the Income Tax Act. Currently, the interest offered on PPF is 8% pa. There are some banks that may provide you with a higher interest rate on fixed deposits in comparison to PPF, but the post-tax return would be relatively lower. PPF offers tax exemption on the invested amount, interest income and the maturity corpus.
PPF allows you to invest in a disciplined manner every month and offers a stable long-term post-tax return. However, there is a lock-in period of 15 years, so that restricts the liquidity exposure. Partial withdrawals are allowed upon completing seven years of investment. The interest offered on PPF is revised every time interest on fixed return instruments goes up.
Debt Mutual Fund
If you are looking to invest a lump sum amount in a relatively liquid asset, debt funds could be an attractive option. You have the option of investing through SIPs as well. The risk associated with debt mutual funds is relatively higher than that of FD products, but the return potential is high as well. Investment in debt mutual funds for more than three years is considered long term and the tax rate applicable is 20% with indexation benefit. FD investment is subject to TDS only if the interest income in the relevant financial year exceeds Rs 10,000.
Corporate FDs offer a higher interest rate compared to bank FDs. To a large extent, the interest rate depends on the credit ratings. Higher ratings may translate into lower interest rate and vice-versa. Corporate FDs provide a higher return, although there’s more risk involved compared to bank FDs and other fixed return instruments. FD investment is subject to TDS only if the interest income in the relevant financial year exceeds Rs 10,000.
National Savings Certificate (NSC)
NSC is ideal for investors looking for risk-averse options along with tax benefits. With an interest rate of 8% per annum, the tenure associated is five years. One thing to note here is that the interest rate remains constant for the entire tenure of five years once you have invested in it. Investment in NSC is eligible for tax deduction benefits U/s 80 (C). The interest income in the initial four years is re-invested and compounded annually, and is thus not taxed within that time period.
(The writer is CEO, BankBazaar.com)