Are you still investing in Fixed deposits ?
Obvious answer from everyone will be YES. In India still more than 80% of the financial assets are in fixed deposits. Other financial assets are Mutual funds, Insurance, Stocks, NCD’s, Debentures etc
Advantages of Fixed deposits ;
The advantages of people sticking with Fixed deposits are,
- Known product
- Highly regulated
- Guaranteed returns
Known Product ;
The foremost reason for everyone to invest in fixed deposit is that it is known product. Yes, right from the time we have known these fixed deposits exists. No one can cheat on these bank fixed deposits.
Highly regulated ;
All public sector and private sector banks are highly regulated by Reserve Bank of India. There are set of rules and regulations on how much deposit should be maintained by each of the bank as per the norms.
Even lending between banks based on the framework laid out by RBI. All banks should go through yearly audit, which will be monitored by them.
Guaranteed returns ;
More than the above this guaranteed returns are bringing the customers back to fixed deposits. From the time the elders have started earning, these fixed deposits have generated huge returns.
Why you should find an alternative to Fixed deposit ?
The reason to find an alternative is for better returns. Though the fixed deposit generates fixed returns, it has gone down in the last few decades.
Let us look at the interest rates of fixed deposit deposits in the past few years and compare it with the inflation for the same period,
Actual returns is nothing but, deducting inflation rate from fixed deposit returns,
So the actual returns is going down in the last few years looks increased.
Inflation is calculated only with the basic expenses you are incurring for food, petrol etc. Increase in purchasing power of individuals, easy money and credit have forced many to spend on things which was not needed immediately.
These above mentioned things are not included in Inflation rate calculation. Hence the actual returns is eventually NIL and may go down to negative.
Consider investing part of your fixed deposit investments in NCD, which may give you better returns. If you need higher returns, try investing in equities.
One such alternative to fixed deposit is NCD. Non convertible debenture is of 2 types,
Secured NCD will have collateral security against the corpus they are raising. Unsecured NCD will not have any collateral and hence they have higher returns. When it comes to safety again you can check the CRISIL ratings for these NCD’s. On the backdrop of IL&FS and Reliance home finance debacle, the risk still exists.
Therefore it is better to invest in secured NCD, when you are going to invest your lumpsum investment. Invest a small sum for diversification and for better returns.
In the recent past L&T financial services, JM financial, Muthoot finance etc have issued NCD’s with interest rate ranging from 9% to 10.5% for a period of 3 years to 10 years.
Currently in the month of May 2019, ECL finance is issued at 9.90% for period of 2 years. It has interest rate as high as 10.4% for 5 to 10 year period.
Case Study ;
One of my client have invested her 25 lakhs in Indiabulls finance NCD which was issued a year back. She receives close to 9% on a quarterly basis. She is happy with the returns and it is taking care of her household expenses.
On maturity during 3rd year, she is planning to use it for her daughters higher education.