What are the Best Alternatives to Fixed Deposits in India?
Last Updated : Aug. 14, 2020, 4:16 p.m.
Want to invest in a product that offers you a fixed stream of income? A fixed deposit might just come to your mind. It is a type of investment that helps you earn a fixed interest over the tenure. But over the last couple of years, fixed deposits are losing appeal because of the falling interest rates. A lot of reasons have contributed to the fall, including the sharply reducing lending rates. The sharp fall has reduced the gap between the deposit and lending rates and put pressure on the margin of banks. As a result, banks have had to cut fixed deposit rates to ensure profitability is not hurt. All major banks such as SBI, ICICI Bank and HDFC Bank have slashed their FD rates . The FD rate has now fallen to 2.90%-6.50% per annum on average. With rates declining so much, what are the alternatives you have for a fixed deposit? Several products offer you more flexibility and benefits than a Fixed Deposit . Read this post and know about the investment options other than a Fixed Deposit.
Public Provident Fund (PPF)
Public provident fund is an investment scheme that earns you higher and offers stable income, making it a better alternative to a Fixed Deposit. Proper safekeeping of your deposit amount is the same as the Fixed Deposit. To open a PPF account, you just can either go to a Post Office or a nationalized bank. Just submit the duly filled application form with the necessary documents authenticating your identity and address. The maximum investment tenure for a PPF account is of 15 years before which funds cannot be withdrawn completely. You can extend the investment period up to 5 years post the PPF account maturity a per your need. If you need funds, you can do a premature withdrawal from your PPF account after completing 6 years from 7the year onward. A minimum of INR 500 to a maximum of INR 1.5 lakh can be invested in the PPF account in a financial year. This investment can be made either on a lump sum or installment.
To ensure that the account remains active, the investment should be made every year without any break. You can also apply for a loan against the PPF account the same as the loan against Fixed Deposit. You can avail up to 25% or less of the account balance as a loan against PPF. The applicant is eligible to apply for the loan if the PPF investment is between 3-5 years. Tax benefits can be claimed under section 80C of the Income Tax Act of 1961. You must make sure that the investment in a financial year does not exceed INR 1.5 lakh. The total interest on PPF investment is exempt from any tax.
Voluntary Provident Fund (VPF)
A voluntary fund contribution from the employee towards the provident fund account is termed as a Voluntary Provident Fund (VPF). The contribution in VPF is more than the regular 12% EPF contribution. The maximum contribution one can make is 100% of his/her Basic Salary and Dearness Allowance. The interest earned on the VPF is the same as the EPF that is 8.65%. Employers aren’t obligated to contribute to their employee’s VPF account. Once you open a VPF contribution, the same cannot be terminated before 5 years of its base tenure. A VPF is an extension of the EPF account, so only the salaried individuals who receive their monthly payments can apply for it.
To open a VPF account, you can ask your HR or Finance team to request for an additional contribution in VPF. Your existing EPF account will serve as the additional VPF account once the application is approved. The account can be transferred from one employer to another when you change jobs. You can also do partial withdrawals or complete withdrawals. If you withdraw before the 5-year minimum tenure, taxes will apply to your deposit amount. Once the employee resigns or retires, the final maturity amount is paid to him/her in full. If the account holder dies, the nominee can get the possession of the VPF account.
Recurring Deposit
If you are looking for a low-risk investment tool the same as the Fixed Deposit with assured returns, Recurring Deposit (RD) is an alternative for you. It comes with a flexible tenure ranging from 6 months to 10 years. You can invest in RD of various banks and NBFCs. You can choose an amount to be invested every month for assured returns. If you do not have a lump sum amount to meet your financial needs, depositing a small amount to the Recurring Deposit account every month serves your purpose well. You can start with a minimum investment amount of INR 500. However, to choose the right Recurring Deposit, you should compare the interest rate, tenure and deposit amount.
The total amount that you have invested and earned in interest is disbursed after the maturity period completes. The interest rate on Recurring Deposits ranges from 5%-8%, which is fairly similar to Fixed Deposits. And the periodic investment makes it suitable for you to create a corpus through the monthly savings. You can withdraw money from Recurring Deposit at maturity only. If you make a premature withdrawal, a penalty would be charged.
National Savings Certificate
The National Savings Certificate (NSC) offers you a guaranteed interest and complete capital protection, just like Fixed Deposit investments. The Government of India has introduced the National Savings Certificate as a savings scheme for Indian citizens. Hence, Hindu Undivided Families (HUFs), Trusts, Private and public limited companies and non-resident Indians (NRIs) are eligible for the scheme as per the terms and conditions.
If you have a Savings account with a Post office, you can apply for NSC in e-mode if you have access to internet banking. It can also be bought on behalf of a minor or with another adult as a joint account holder. NSC earns you an annual fixed interest rate of 7.9% per annum, which is revised every quarter by the government.
Debt Mutual Funds
Debt mutual funds are a type of mutual fund that invests in debt securities, which are considered relatively safer, to generate fixed incomes. These funds invest in instruments such as treasury bills, corporate bonds, commercial papers, government securities, etc. You should invest in debt mutual funds and expect 7%-9% returns on your investment.