Introduction

Fixed Deposits (FDs) are very popular payment techniques in India due to their safety, predictable returns, and favourable tax treatment. Opening an FD account is straightforward, as it promises a fixed rate of interest and is regarded as a safe investment. However, FDs are not the only option one has. If you desire more freedom, shorter maturity durations, or greater returns, then these other investment options may be worth your consideration. Depending on your goals, these alternatives may be better suited to help you achieve your objectives while balancing the risk you are willing to take.

This article outlines five smart investment options to diversify your portfolio beyond FDs, tailored to varying goals and risk appetites.

1. Debt Mutual Funds

Debt mutual funds are pooled vehicles that invest your money in fixed-income investment options like government bonds, corporate debt and money market securities, making it suitable for someone looking for a low-risk investment opportunity with high yields compared to Fixed Deposits (FDs), typically 6 - 8% depending on the type of fund. For short-term needs (3 - 12 months), liquid funds generally have low volatility and quick access to your cash, and are like FDs in terms of liquidity without a mandatory lock in. For term horizons of 1 - 3 years, you may consider short-term funds or ultra-short maturity funds that will provide a balanced portfolio of yields and safety. Alternatively, if you think the interest rates will fall, you may consider long duration funds that can provide capital gains, in addition to accruing interest income.

In contrast to fixed deposits, debt funds do not have a fixed maturity, so you are free to withdraw your money any time (exit loads may apply). Debt funds rely on your tolerance for risk as they have moderate, level risks- returns are affected by change or volatility in the interest rate and company credit default. By sticking with highly rated funds, you can limit the level of risk associated with changing interest rates or company defaults. If you are a conservative investor, debt mutual funds are a good investment option.

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2. Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a government-backed option that provides safety and offers reasonable tax benefits. For those looking for long-term, risk-free returns, PPF is an excellent choice. With a lock-in of 15 years (with an option to extend in 5-year blocks), PPF benefits goals like retirement or children’s education. You can also invest up to ₹1.5 lakh/year, which is deductible under Section 80C. PPF’s may guaranteed returns and tax-free maturity make it more beneficial for those who can afford to lock in their money for a longer period (as compared to FDs). You are allowed to partially withdraw after 7 years, but only a small amount at a time. Its only downside is the length of the lock-in, but it is perfect for investors with a long-time horizon who don’t need liquidity. For an investor who wish to keep safety-first, PPF could be the best component of a diversified portfolio.

3. National Pension System (NPS)

The National Pension System (NPS) is an invested flexible and long-term plan backed by the government which is aimed at assisting individuals to build a corpus for retirement. The investment uses your money broadly across different asset classes, such as equities', bonds; corporate and government, to blend growth with risk and stability.

NPS accounts come in two types:

1. Tier I - A retirement account which funds cannot be accessed until the individual reaches 60 years of age and is aimed specifically for retirement purposes.

2. Tier II - A voluntary account with no restrictions on how many times deposits and withdrawals can be made, it operates like an everyday savings account but without tax advantages. NPS is designed with a long-term investment strategy, the average return is between 8% to 12% over the last decade depending on the asset allocation in use. As of April 1, 2023, any new contributions will be taxable as per the applicable income tax slab at the point of withdrawal, particularly for the annuity component.

4. Real Estate Investment Trust (REIT)

Real Estate Investment Trusts (REITs) allow you to invest in commercial properties like an office building or shopping mall without having possession of any real estate assets. In India, REITs provide a yield from dividends between 6-8% with the opportunity to earn capital gains which would provide protection against inflation. REITs are listed on stock exchanges, which provide liquidity that Fixed Deposits do not; and because there is no requirement to lock in your money for many years or close a real estate transaction, REITs keep an investor's opportunities open.

REITs carry moderate risks; economic slowdowns or real estate slumps can dent returns. Yet, their income-generating nature and diversification across assets make them less volatile than stocks. For investors seeking passive income and real estate exposure, REITs are a modern, accessible alternative to FDs.

5.  Government Securities (G-Secs)

Government securities have various types of investments such as, Treasury Bills (T-bills) held for short-term purposes and government bonds held for long-term purposes. T-bills are offered for terms of 91 days, 182 days, or 364 days. T-bills are sold at a discount and do not pay interest on a regular semi-annual basis. They are appropriate for brevity in financial planning while government bonds are available in maturities up to 40 years and pay interest on a regular semi-annual basis, so they provide you with a stream of income for half the bond year. State Development Loans (SDLs) are largely identical to government bonds except that SDLs are issued by the State Government, have maturities of 3-35 years, and pay interest on a regular semi-annual basis. These government-backed securities provide the nests for prudent investors who want secure and low-risk investments and allow investors the specificity to cater for their immediate or long-term financial goals.

Conclusion

Fixed deposits remain a wise choice, but their modest returns limit wealth-building potential. Debt and G-Secs, PPF, NPS, and REITs offer smarter paths to grow your money, balancing risk, returns, and flexibility. By diversifying across these options, you can outpace inflation and achieve your financial dreams. Start small, stay informed, and invest with purpose, your future self will thank you. Before investing, research fund performance, check ratings (for debt funds or REITs), and account for costs like expense ratios or taxes. Consulting a financial advisor can align choices with your unique circumstances.

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