Fixed deposits have long been holy grail of investments in India. People across generations have considered FDs as the synonym of savings in India. 8% assured returns without any tension of market vagaries and volatilizes has ensured that people have utilized FDs for everything and anything, ranging from Retirement planning to Kids' education to Kids' wedding. But off late this situation is changing and returns on FDs are consistently on a downward spree. Nowadays highest interest rates of FDs vary from 6% to 6.5%.
This reduction in interest rates has been followed by restlessness among the loyal investors of FDs, who have never explored anything to invest into beyond FDs. Through this article I will cover alternates to FDs which are safe and still provide returns which are comparable to, if not more than what FDs provide.
First alternate is Liquid Funds. Liquid funds are debt funds which invest into debt papers of very short duration like 15 days to one month. They are used by investors to park funds that maybe required at very short notice. They don't have any Exit Load and hence you can redeem them anytime without any penalty to you.Its taxation is better than the taxation of FD or saving account.If you keep it for more than 3 years, then it will be less than 20% , against 30% in FD. If you keep it for less than 3 years , taxation will be same as FD or saving account interest.Read about their taxation in Debt Funds - The Tax Warrior against FDs.
As FDs are preferred for ensuring capital protection (i.e. no loss of the invested amount), liquid funds are a good alternate to FDs because of their very conservative investment philosophy. Below is Fund performance (as of 2nd Sep'17) of major liquid funds available in the market -
Next alternate to FDs which is safe and provides good returns is Arbitrage Fund. Arbitrage funds exploits price differential in different markets for same asset. Like e.g. a stock is available for higher price in BSE than price in NSE, so an arbitrage fund manager will buy stocks from NSE and sell in BSE. Such price differential arises for a very small time like 5-10 seconds and are readily capitalized by fund managers. As they undertake transaction only when price differential exists, Arbitrage funds provides capital protection to a very large extent. Best feature is their tax treatment which is nil taxation after one year and 15% tax on gain if investment is redeemed within one year. Below is the performance (as of 2nd Sep'17) of some major arbitrage funds -
As can be seen Liquid Funds and Arbitrage Funds , not only provide higher returns than FDs, they also enjoy better tax implications. Read about another alternate to FDs in Debt Funds - The Secure Mutual Funds
