Which Instrument is Better than Fixed Deposit (FD)?

Which Instrument is Better than Fixed Deposit (FD)?

Investment is always considered a responsible decision. Hence, experts in India advise not to make haste when it comes to investing your hard-earned money. It is necessary to gather detailed information about the product and its features and learn about the pros and cons before making a payment transaction.

If you are a risk-averse individual, making investment in a safe instrument guaranteeing capital protection is a better idea. Fixed deposit is one such product. Fixed deposits have been the prime choice of investment for the retail investors in India.

Alternatives of Fixed Deposits

A few of the features make FDs an attractive product offered by banks (private and nationalized) and Non-Banking Financial Companies (NBFCs). The rate of interest depends on the tenure you choose the bank or the NBFC you choose, and the amount of capital you wish to invest. FDs are considered for many good reasons but the returns on investment (ROI) in a FD is low.

The low interest income is the prime reason that has forced people to look for alternatives of Fixed Deposits. Today, there are a few alternative investment avenues that can offer better returns and capital protection.

It has been observed that bonds are one of the best alternatives of fixed deposits in the category of fixed income securities. Bonds are a debt security issued by various issuers in need of capital. The issuer of bonds instead of seeking loans from banks at a higher rate of interest prefers raising money from the investors. For the same, bonds of different types are issued that assure a bondholder a fixed coupon payment and total protection of capital.  

How can I earn more than FD?

If you are looking to earn a higher rate of interest, enjoy liquidity, avoid risks, and get the benefit of total capital protection, read through the content carefully. The most common question that has been answered many times is – How can I earn more than FD? Here we are going to learn more about it and find the answer to the above question.

Read More: How To Calculate Fixed Deposit Interest Rates?

There are many investment avenues that offer comparatively more returns than fixed deposits. Each of the instruments has its own advantages and disadvantages. You can go through the product information carefully prior to initiating your payment transaction for the investment. A few of the better investment options with high returns in India are Treasury bills, Bonds, Liquid funds, Short-term funds, gold, etc. You can earn more than FD by taking a wise decision to invest.

The fixed income instruments that beat the FD rates

Pradhan Mantri Vaya Vandana Yojana (PMVVY) Scheme

ü  Presently offers an assured annual return of 7.66%.

ü  The rate of interest may vary based on the interval for interest pay-out.

ü  The interval for interest payment can be Yearly, Half Yearly, Quarterly, or Monthly)  

ü  The minimum amount for the investment in Pradhan Mantri Vaya Vandana Yojana (PMVVY) Scheme is Rs. 1.5 lakh.

ü  The maximum investment allowed is Rs. 15 lakhs.

ü  It is facilitated by LIC and has no tax benefits.

RBI Floating Rate Bonds

ü  The RBI Floating bonds can provide the return of 7.15 per annum {current interest rate of NSC is 6.8%, and you add 0.35% as RBI Floating bonds is linked to National Savings Certificate (NSC)}

ü  It has maturity of 7 years

ü  Investment in RBI Bonds can be made through banks, brokers, and other sources.

High rated Corporate Bonds

ü  AAA rated corporate bonds are a safe investment option

ü  Liquidity and minimum risks

ü  The coupon payment can typically range between 6.5 to 8.5 %, or even more subject to the financial condition and liquidity feature of the issuing company.

How bonds are better than FD?

Although FDs and bonds have their own pros and cons, they are preferred by investors because of their features. If we look for the answer to the question – How bonds are better than FD, let me tell you that Bonds are better than FD in many scenarios.

Bonds are a medium to borrow money directly from the lenders in the market. Firms issue bonds whenever they require funds to finance their existing or potential projects and to meet their need for working capital at a different period of time.

You can earn more than FD by investing your surplus amount in bonds that are preferred for higher rate of interest (coupon payment). Bonds and FDs, both have their own importance. Both are preferred for their features and advantages.

Let us understand bonds in a better way. Governments, corporations, and other entities issue bonds when they need money to fund their need for capital, projects, business operations, and more. Raising funds through the medium of bonds is cost-effective. Also, issuers save money on interest payable to the lending institutions on seeking bank loans for various purposes. Bonds are classified into various types based on their features, pros and cons.

The popular bond types include:

  • Perpetual bonds
  • Zero-coupon bonds
  • Fixed-rate bonds
  • Floating-rate bonds
  • Government bonds
  • Corporate bonds
  • Green bonds
  • Zero-coupon bonds
  • Callable Bonds
  • Puttable Bonds
  • Convertible Bonds
  • Inflation-linked bonds

How bonds are better than FD?

The comparison between bonds and FDs can help us understand better how bonds are better than FDs.

ParticularsBondsFixed Deposit (FDs)
Capital ProtectionGovernment bonds are known to provide complete capital protection with Zero Risk as they are issued by Government of India and managed by RBI. FDs provide capital protection but up to 5 lakhs only through Insurance by RBI,
LiquidityGovernment Securities including government bonds are fully tradable in the secondary market and are not chargeable on premature exits.Bank FDs provide the liquidity feature but for a premature withdrawal of the fixed deposit, a bank generally charges 0.5% to 1% of the interest rate
Security Feature  Government bonds have a sovereign rating which makes it one of the safest and secured investment options.Banks have the risk of default or Financial Stress as seen in the past which may impact your investment in FDs.
Trust FactorSince Government bonds are issued by the Central government or State government of India, and backed by sovereign guarantee, the trustworthiness in Government bonds is relatively more than a bank FD. People invest in Bank FDs because of the trust in banks.
Better ReturnsOn the other hand, Government bonds can help you earn 2-2.5% more returns on your investment.The interest on bank FDs typically ranges between 3.26 % and 5.30% subject to tenure and the bank.
Easy LoansGovernment bonds can be used for loans from any bank and NBFC at very attractive terms at many times better than FDs.You can raise a loan against your FDs only from the bank where you have your FDs,
Ease of Transaction When it comes to ease of transaction, Government bonds are more flexible.You typically need to have a savings account in the bank where you wish to open a FD.

The above comparison proves bonds relatively better than FDs. There are a few other attractive instruments that are considered better than fixed deposit. Bonds are a popular instrument chosen for its great features, higher returns, capital protections, and liquidity. It is thus considered a better investment option and alternatives of fixed deposit in India.