The majority of the investments apart from fixed deposits are subject to market risk. People who are not willing to take a plunge in high-risk market prefer savings over investment. The market is always fluctuating which in turn affects the market rates. As for savings, they accrue certain rate of interest on a yearly basis and do not get affected by the market conditions.
Currently, the interest rates being offered on small saving schemes are pretty beneficial. The government has reduced the rate of interest on small saving schemes. For the third quarter viz. July to September, which has led to deduction of 10 basis points. Regardless of this move, for people who fall within the 10-20% tax bracket, it is advisable that they invest in small saving schemes as it is still attractive. Similar cannot be said for people with higher tax bracket. For them, investing in other option such as debt mutual funds is a better choice. However, is that the only option?
No. Apart from that, there is an option to invest in FD. However, while investing in fixed deposit, it is important that you consider Non-Banking Financial Companies (NBFCs) over banks as they are the ones who are offering a better rate of interest. A fixed deposit in an NBFC will work in your favour when it comes to beating inflation. For instance, let us consider inflation at 4.5-5%. In such a case, your investment must yield more than 5%. The majority of the financial institution offers a fixed deposit rate of interest around 8%. Note that this is more than what banks offer. Thus, the surplus income on interest is quite beneficial in this scenario.
Apart from this, there are several other options you can invest in, but are they better than fixed deposit offered by an NBFC? Let’s check it out.
Post Office Fixed Deposits: Many experts might suggest you invest in this avenue. However, the rate of interest offered under POFD (Post Office Fixed Deposit) is 7.1 percent to 7.6 percent which is less than what NBFCs offer. Furthermore, an investor has to lock in for 6 years to avail 8% rate of interest. That is not the case with NBFCs where you can avail the same benefits in 5 years.
Public Provident Fund: Government has been introducing consistent changes with regards to PPF (Public Provident Fund) rates. These are consistently reducing. The current rate of interest offered is at 7.9% and is expected to reduce even further. So if you are planning to invest for a long-term, it will not help you much.
Senior Citizen Scheme: The most favourable option is that of investing in a Senior Citizen Scheme. However, the scheme still does not top the rates provided by an NBFC. If you were to approach any bank, they would offer you a rate of interest of 8%. NBFCs offer you a higher interest rate than that. Thus, even in this option, NBFCs are a better choice.
Is it Advisable for an Individual with Higher Tax Bracket to Invest in an FD?
This depends upon the investor’s’ psychology. If he is inclined towards safe investment then yes but if he wants more returns than No. The current fixed deposit rates are not beneficial when it comes to tackling inflation rate. This is because the inflation rate is close to the fixed deposit rates earned by the highest tax bracket (30%).
Thus, the decision has to be made by you, depending upon your investment strategy. Fixed Deposit might be reeling, but FD high interest rates offered by NBFCs are still quite favourable to consider.
Summary: There are several options in which you can invest. This readily depends upon your investment strategy. Although savings involve less risk; fixed deposit still outshines it.