Why You Should Rethink Fixed Deposit Investments

Fixed deposit rates have come down over the last few months and are expected to fall further. Analysts say investors should look at other avenues to maximise returns at a time when interest rates are headed lower.

Here are some options that may offer higher returns.
1) Tax-Free Bonds: They are issued by government-backed entities and have low default risk. Interest is typically paid annually and is not subjected to tax, unlike fixed deposits. Such bonds can also be purchased from the secondary market, where tax-free bonds like NHB are yielding around 7 per cent for a 9-year residual maturity. In contrast, a fixed deposit for a similar tenor from SBI is offering 8.25 per cent, says Vishal Dhawan of Plan Ahead Wealth Advisors. Investors in the 30 per cent tax bracket will have to pay taxes on the interest earned on fixed deposits, so the 8.25 per cent rate translates to 5.70 per cent on a post-tax basis. If interest rates fall further, bond prices will appreciate, increasing returns.

2) Debt Funds: Fund managers remain bullish on debt mutual funds that invest in longer tenure government and corporate bonds, given the prospect of further rate cuts. In the past one year, the average mutual fund return from schemes that invest in medium to long-term government bonds is 17.65 per cent, according to Value Research, with the top performers fetching returns of more than 20 per cent. Debt mutual funds are also more tax efficient than FDs.

3) Systematic Withdrawal Plan (SWP) in debt funds is a good option for those investors who want to withdraw money from an existing mutual fund at predetermined intervals. There are two options. In the fixed withdrawal option, investors get specified amount on a monthly/quarterly basis, while in appreciation withdrawal, only the appreciated amount can be withdrawn on a monthly/quarterly basis. As compared to bank fixed deposits, systematic withdrawal plans are also more tax efficient. They also don't attract TDS (tax deducted at source) unlike bank FDs.

4) Corporate deposits are a good option, but investors should focus only on top-rated schemes, analysts say.

5) Monthly Income Plans (MIPs) offered by mutual funds are a good option for investors who can take moderate amount of risk. Such schemes invest bulk of their portfolio in debt securities and the equity allocation remains typically capped between 10 per cent and 25 per cent.