Why do you invest money? The two objectives of any investment are to ensure the safety of your money and enable you to get good returns. So, the law of economics says that the higher the security, the lower the returns. A bank or a post office FD is considered one of the most secure avenues for investing money. Hence, the returns are the lowest. So, we shall discuss some investment options that can be better than a 5-year FD.
Earn 3 To 4 Times Of What You Earn From Bank Fixed Deposits
A corporate FD is in no way different from a bank or a post office FD. The primary distinction is that you entrust a corporate entity to keep your funds safe. Corporates need funds for their functioning. Bank loans can be expensive. So, the better option is to accept FDs from the public.Why would anyone invest in a corporate FD when the banks and post offices offer guaranteed returns? Therefore, corporate FDs provide better returns than bank FDs with the prime objective of attracting investment. However, risk is involved because the chances of a corporate entity defaulting on the repayment are higher than bank or post office defaults. Therefore, returns-wise, corporate FDs are better.
If you feel bank and post office deposits are safe because of government backing, would it not be better to invest in government bonds? The idea seems good because it ensures 100% safety of your investment. Besides, government bonds offer slightly better interest rates than bank and post office FDs. On the flip side, government bonds have an extended lock-in period. So, they are comparatively less liquid than bank FDs. However, they offer better returns.
Debt Mutual Funds
It is challenging for an individual to invest in different securities to earn the maximum returns. The ideal alternative is investing in debt mutual funds. This type of mutual fund is also known as a fixed-income fund because it invests your money in fixed-income instruments like corporate debt securities, government bonds, and other fixed-income market instruments.
Debt mutual funds are attractive investments because of their low entry barrier. Anyone can invest in these funds that generate regular returns while maintaining the investment secure. Besides, debt mutual funds are liquid, allowing investors to exit. So, they are better investments than a 5-year FD.
An equity fund differs from a debt mutual fund because it invests your money in reputed listed companies' equity shares and stocks. Equity funds are broadly classified into active funds and passive funds. The active equity funds have the fund manager selecting the companies carefully before investing in them. On the other hand, a passive equity fund follows a reputed market index like Nifty or Sensex and invests accordingly.
You can further classify equity funds into small-cap, mid-cap, and large-cap funds, depending on the capital structure of the companies. First, equity funds can generate good returns, but they are subject to market risk. Secondly, equity funds are not as liquid as bank FDs. Nonetheless, they present a better investment option than the 5-year FD.
Fixed Maturity Plans
Fixed maturity plans are mutual funds that invest in debt securities having a fixed maturity date from six months or a year to even more extended periods. Accordingly, you can select your tenure. The fixed maturity plans offer better returns than the 5-year bank FDs, but they are not as liquid. However, the risk factor is lower than equity and debt mutual funds. So, they are good alternatives to 5-year FDs..
If you wish to go for liquid investments, the liquid funds are the best because these funds invest your money in high-quality market securities for maturity periods of less than 91 days. These investments do not have any lock-in period like the government bonds or corporate FDs. However, the returns are not guaranteed because they depend on market risk. These investments are suitable in a rising market but can produce negative returns if you invest during a falling market regime.
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We have discussed six options for the 5-year bank or post office FD. Each option has its merits and demerits. So, your investment depends on your risk appetite. If you are averse to taking risks, it is better to invest in safe instruments like bank FDs, government bonds, etc. But alternatively, if you can withstand a certain amount of risk, the mutual funds are better than bank FDs because they can deliver better returns.