Is there a better investment than FDs?

Historically, FDs were the easiest and only saving option NRIs had in India. However, are they really a wise investment in today’s economic scenario?

Recent statistics highlight that NRI investments into FDs remains significant, with inflows doubling to $7.8 billion between April and August 2024, as reported by the Reserve Bank of India. This heavy reliance on FDs, while seemingly safe, can mask several hidden risks. So whats a better alternative to FD?

Short Answer: Debt Funds. Let’s find out how and why?

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Why Debt Funds Outshine FDs

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Redemption Flexibility

Fixed Deposits are automatically redeemed upon maturity, offering no leeway to time your exit. Debt funds, on the other hand, empower investors to redeem their holdings whenever they choose. Whether you need to liquidate due to a financial emergency or strategically exit during market highs, debt funds give you complete control.

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Tax Efficiency

FDs are taxed at maturity, and the interest earned is added to your income and taxed as per your applicable tax slab. In contrast, debt funds are only taxed when you redeem your investment.

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Superior Liquidity

FDs typically come with a lock-in period, and premature withdrawals attract penalties that eat into your returns. Debt funds, however, do not have a mandatory lock-in period. While some funds may levy an exit load if redeemed within a specified timeframe. After this duration, you can redeem without any additional charges, ensuring high liquidity.

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Partial Withdrawal Facility

FDs allow partial withdrawals, but this usually incurs penalties and disrupts the overall structure of your investment. Debt funds provide unparalleled flexibility by enabling you to redeem only the amount you need while the rest of your investment continues to earn returns.

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Diversification

FDs concentrate all your money in a single bank deposit, offering no diversification and fixed return. Debt funds, however, spread your investment across multiple securities and issuers, reducing risk and offering a more balanced approach.

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Convenience of SIPs and STPs

Debt funds support Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs), allowing you to invest periodically or transfer your investments into other mutual funds systematically. This adds flexibility and helps in planning long-term financial goals effectively. While with FDs, you have to invest a lumpsum amount in a go.

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Slightly Better Returns

The average return from FDs over a period of 5 years is around 6%, whereas for debt funds, it ranges between 4.9% and 11.3%. Debt funds invest in high-yielding securities, giving you a chance to earn slightly better returns than FDs.

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Conclusion

FDs are an excellent source of investment if you want to earn fixed returns. However, they lack the potential to generate long-term wealth. To maximize your wealth and achieve all your financial goals, it is important to diversify your portfolio across multiple investments. By breaking free from the traditional FD mindset and embracing a more diversified investment approach, you can unlock the potential for higher returns and financial freedom.

For investing is always best to take the help of a qualified financial advisor to get a tailor-made investment portfolio. Try our iNRI’s Smart Investing Tool, which will help you create a portfolio tailored to your unique preferences and financial goals.

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