Indians have over ₹ 151 lakh crore invested in fixed deposit accounts.
If you go by the general notion, fixed deposits have long been considered to be one of the best investment instruments. Their safe nature and the associated guarantee of fixed returns have made them a favourite among defensive and conservative investors. Even some aggressive investors use fixed deposits as a hedge against their risky bets.
There is no denying that fixed deposits do offer a lot of benefits that are difficult to ignore. However, today’s economic scenario is unique. We are living in unprecedented times and things have changed dramatically.
In the interest of bringing you the best investment options, our team at LenDenClub has dissected the fixed deposit as an investment to bring you face-to-face with the truth.
A Quick Overview on Fixed Deposits
As the name suggests, a fixed deposit is a lump sum deposit that an investor (usually) makes with a bank for a specified period, usually ranging between one and three years. However, other organisations, such as the Indian Post Office, also have their own fixed deposit products that one can explore.
In exchange for depositing your money, you are a fixed interest rate that is usually paid at the end of the ‘tenure’ of the fixed deposit. Both, the tenure and the interest rate are decided at the beginning when you open your fixed deposit account.
In most cases, this interest rate ranges between 5% and 7%, with longer tenure investments attracting higher interest rates. Most organisations have special, slightly more attractive interest rates for senior citizens.
What Are The Alternatives To Fixed Deposits?
One of the most attractive alternatives to fixed deposits is peer-to-peer or P2P lending. As the name suggests, P2P lending enables investors to become lenders and lend money to borrowers, enabling them to earn an interest rate on their investment.
Investors agree to become lenders because the returns of P2P lending are usually significantly higher than FD rates or bond rates. While technically, the undertaking is riskier than FDs and Bonds, most leading P2P lending platforms, like LenDenClub, have mechanisms and policies in place that help safeguard the interests of the investors.
One of the most obvious risks associated with P2P lending is that the borrower may default. However, all borrowers on platforms like LenDenClub have to go through a strict check of their creditworthiness before they are allowed to borrow from lenders. Moreover, LenDenClub also ensures that lenders don’t invest more than Rs. 5000 with one borrower. This way, lenders can manage their risk much more efficiently.
P2P lending can be a considerable alternative to FD. However, it is also a great means for portfolio diversification due to its non-market-linked nature.
Bank bonds are another investment instrument that is quite popular among risk-averse investors. Just like P2P investments and fixed deposits, bonds also offer the promise of a fixed return. However, they are different from fixed deposits in many aspects.
So what are bonds?
Bonds and P2P investments have a lot in common. Just like a P2P investment, a bond is like a loan that you, as an investor, give to the bond issuer. The ‘bond’ is an agreement that the investor and issuer sign. The agreement defines the fixed interest that the investor earns at the end of the tenure, which is also defined in the bond agreement.
Generally, bonds are a little riskier in comparison to fixed deposits. This is because, with bonds, there is the risk of the issuer’s credit rating dropping. If this happens, the investor may not get their interest and principal payments on time. For this reason, when picking bonds, it is advisable to stick to AAA or AA-rated bonds exclusively.
In other words, unlike fixed deposits, bonds are volatile in nature. If you sell your bond at a profit before maturity, the gains you make are taxed as capital gains. If you don’t want to deal with the volatility and still want to make handsome returns, P2P investments on the LenDenClub app are a great option.
Opening an FD in Indian Post Office – How-To Apply, Eligibility, & More
Among the non-bank fixed deposits, those offered by the Indian Post Office are quite popular. This is because the Indian Post Office offers competitive interest rates compared to those offered by banks. Moreover, from an investor’s point of view, the Indian Post Office is an incredibly trustworthy organisation, since it is backed by the Government Of India. TDS is also not applicable on the interest earned through a post office fixed deposit.
The eligibility criteria for opening a fixed deposit with the Indian Post Office is quite straightforward. Minors over the age of 10 and single adults can open their fixed deposits without any problems. A legal guardian can open a fixed deposit for minors below the age of 10 and persons of unsound mind.
The best part is, that you can apply for a post office fixed deposit both online and offline. All you need is identity proof (Aadhar card, driver’s license, voter ID card), address proof (Aadhar card or utility bills), your PAN card, and two recent passport size photographs.
To apply online:
- Visit the e-banking portal of the Indian Post Office.
- Create a new account or use your registered username and password to log in.
- Find the “general services” tab and click on “service request” under that tab.
- Click on “new request” and follow the instructions presented on your screen to open a fixed deposit account.
To apply offline, visit the nearest branch of the Indian Post Office to obtain a form to apply for a fixed deposit. Fill out that form and submit it along with the necessary documents.
Auto-Renew or Withdraw Your Fixed Deposit? – Make The Right Choice
Once the tenure for your fixed deposit ends, you have two options, and you have to choose between these at the time of making the fixed deposit. These options are whether or not you want to opt for an auto-renewal.
As the name suggests, with an auto-renewal, you give your bank or fixed deposit company standing instructions to renew your fixed deposit as soon as it matures. This means, that as soon as your fixed deposit matures, it is put into another fixed deposit for the same period of time. However, the interest rate may not remain the same.
Meaning, that when your fixed deposit gets renewed, the bank will pay the interest according to their current interest rate and not according to the original rate that was decided at the beginning of your first fixed deposit tenure. This interest rate may be higher or lower than what you may have previously received.
So, should you opt for the auto-renewal facility?
The smart move would be to opt-out of the auto-renewal facility. This way, when your fixed deposit matures, you can make a decision based on the interest rate being offered to you at that time.
Different Fixed Deposit Interest Rates in India: A Quick Comparison
Let’s look at the fixed deposit rates offered by the top banks in the country:
|Bank Name||Interest Rates (Tenure- 7 days to 5 years)||Interest Rates For Senior Citizens (Tenure- 7 days to 5 years)|
|State Bank Of India||2.90%-5.50%||3.40%-6.30% (source)|
|HDFC Bank||2.50%-5.60%||3.00%-6.35% (source)|
|Punjab National Bank||2.90%-5.25%||3.50%-5.75% (source)|
|IDFC Bank||2.50%-6.00%||3.00%-6.50% (source)|
|Axis Bank||2.50%-5.75%||2.50%-6.50% (source)|
Considering the fact that India’s inflation rate in 2021 was 6.62%, these returns, while safe, aren’t great.
Peer-To-Peer Lending, A Better Investment Instrument
While fixed deposits offer some lucrative benefits, the interest rates are not good enough to even beat inflation, let alone grow your money. That’s why many investors are looking for an alternative to fixed deposits. One attractive offer that has emerged is peer-to-peer investment.
As the name suggests, peer-to-peer investment works by letting you become a lender and invest money to earn interest. In most cases, the interest rate you earn is substantially higher than fixed deposit rates. In fact, some investors on the LenDenClub platform have made up to 10 to 12% returns p.a.* on their investments for the past five years. Download the LenDenClub app to understand more about how peer-to-peer lending works.