FDs Giving Low Returns? Try These Alternatives


Most of the commercial banks have recently reduced their Savings Account interest rates to 3.50%. Even the fixed deposit rates being offered by the banks have been in the range of 6% to 6.75% for different tenures. Many savers have been finding it difficult to earn decent returns by keeping their funds in bank FDs. However, with the evolution of the financial markets and the banking sector, several investment avenues have emerged in the fixed income segment even for the conservative investors.

Let us look at investment avenues when fixed investments give low returns:

1. Corporate Bonds

Many NBFCs tap the retail market to raise funds for their financing operations. In order to generate the demand for their bonds in the market and to lure the savers, the rates offered are usually higher than the prevailing bank FD rates. One can subscribe to such bonds through their public issues. Such bonds are also listed on the stock exchanges, therefore providing liquidity to the existing investors and an investing opportunity to potential investors. For example, 9.25% 7-year bond issued by an AAA-rated entity, Dewan Housing Finance Ltd., issued last year and maturing in 2023 is currently offering a yield of 8.62% till maturity. However, since such bonds are listed and traded on stock exchanges, their price varies with the interest rate movements.

2. Tax-Free Bonds

For the investors in higher tax brackets, tax-free bonds currently listed on the stock exchanges offer better post-tax returns to their investors. For example, 8.92% 20-year bond issued by a PSU, NHPC Ltd., issued in 2013 and maturing in 2033 is currently offering a tax-free yield of 6.32%, thereby resulting in 9.15% post-tax yield for an investor in 30% tax bracket. As such bonds are listed and traded on stock exchanges, their price varies with the interest rate movements. However, in case you intend to hold the bonds until maturity, your effective yield will remain the same.

3. Fixed Deposits with Small Finance Banks (SFB)

RBI has recently awarded licenses to several entities to operate Small Finance Banks with an aim to spread the financial inclusion agenda in the country. In order to enhance their deposit bases, such banks are offering highly competitive rates to their depositors. For example, Suryoday SFB offers yields of up to 31% to its depositors. Similarly, Utkarsh SFB is offering up to 9.00% interest rates. Even while most of these names will be new to our ears, one can consider such deposits as safe investments with RBI regulatory oversight over the SFBs.

4. Debt Mutual Funds

Even while such funds are suitable for investors with conservative risk appetite, this category is one such category wherein the final returns from the investments are not guaranteed/ fixed. Debt funds invest into a portfolio of fixed income securities, thereby offering regular returns. However, the valuations of the underlying securities in the portfolio keep on changing with the interest rate movements, and the returns can vary and are not fixed like the other three options discussed above.

To conclude

Even though there are several other fixed income options like Public Provident Fund (PPF), Sukanya Samriddhi Account etc., liquidity in such investments is certainly limited/non-existent. Hence, the same has not been discussed here since such products also carry some lock-in period as per the rules governing such accounts. But these must be a part of your investment portfolio from a long-term point of view.

As such, it’s time to act smart, stay smart and invest smartly. One can choose to stay conservative and still earn better returns.  However, one must indeed be cautious to weigh the various options available along with the credentials of the issuing companies for the safety and security of the principal amount invested. Are you one of those smart investors?

Simardeep Singh

Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment.