Alternative Investments to Fixed Deposits

Fixed deposits have been a popular investment choice in India for the longest time. Just lock in a lump sum amount for a fixed tenure at a pre-determined interest rate, and you have created a passive source of stable returns with no volatility. It’s safer, hassle-free, beginner-friendly, and can be created for as low as ₹1000. 

However, with the rising inflation rates and an average of 6-7% annual returns, are FDs really the best investment choice? Or is it time to find better fixed deposit alternatives?

Let’s find out!

Why Do You Need an Alternative to Fixed Deposits?

Fixed deposits are one of the oldest investment schemes that you can invest in and forget without the need for constant monitoring. There are multiple entities that offer FDs. While Nationalized banks offer relatively lower yields, others, like Housing finance companies and other financial institutions, offer decent rewards.

Even though they are a great risk-averse scheme, they come with their own set of drawbacks. Here are some of them:

1) Lower Interest Rate

Due to non-exposure to market volatility, the interest rate on your FD will not vary after creation. However, that also limits FDs from competing against the higher returns offered by other fixed deposit alternatives.

2) No Access To Your Corpus

If you create a fixed deposit for 3 years, you cannot withdraw the amount without paying a hefty fine or losing a portion of your interest. 

3) Inflation

Most fixed deposits of less than 2 crores offer an interest rate of 6-7% or, in some cases, up to 9%. However, if you consider an inflation rate of 4-5%, your net FD returns come down to just 2-3% or even negative if your FD offers a lower interest rate. For instance, as of February 2025, Ujjivan Small Finance Bank offers domestic FDs at 7% p.a. With the current inflation rate at 4.5%, the real return on maturity would be just 2.5%. To maximize returns, opting for FDs with higher interest rates is advisable.

4) Tax Implications

Your interest return on fixed deposits is liable to a TDS of 10% if your total return from FDs exceeds ₹40,000 in a year. This can significantly impact your post-tax returns if you want to invest bigger capital. Here’s a table to compare post-tax returns for various ranges of amounts: 

Investment Amount	Annual Interest (approx. 7%)	TDS Deducted	Post Tax Interest
₹1,00,000	₹7000	₹0.0	₹7000
₹10,00,000	₹70000	₹3000	₹67000
₹50,00,000	₹3,50,000	₹31000	₹319000

Based on this, let’s say if an investor in the 30% tax bracket earns 7% on an FD, the post-tax return drops to 6.7%. If inflation is 5%, the real return would be 1.7%.

For investors seeking better post-tax returns, higher liquidity, or inflation-beating growth may consider alternatives such as debt mutual funds, corporate bonds, or other market-linked instruments that provide greater flexibility and potential for higher real returns.

What Are the Best Alternatives to Fixed Deposits?

Now that you understand the limitations of this investment instrument, here are some better investment options than FD: 

1) Debt Mutual Funds

Unlike fixed deposits, debt funds invest in government bonds, treasury bills, and other money market instruments. Similar to other mutual funds, they are also managed by professional fund managers, offering a diversified portfolio of debt instruments. Since their investments are highly secured, they are considered much safer than other mutual funds and are also less volatile. 

If you consider them as an alternative for fixed deposits, you have multiple choices among liquid funds, gilt funds, short-term funds, etc., that are not available with fixed deposits. This allows you to choose a fund that suits your financial goals with better returns. Additionally, most of these funds are highly liquid, so you can easily withdraw your money without being fined.

However, it should also be noted that while debt funds may offer higher post-tax returns than FDs (especially with indexation benefits), they are subject to NAV fluctuations, interest rate risk, and default risk (in the case of credit risk funds).

2) Fixed Maturity Plans (FMPs) 

Even while sharing many similarities with FDs, fixed maturity plans are still considered a better alternative of fixed deposits. These plans mimic the maturity tenures of the debt instruments and securities that they invest in. For example, an FMP for 1 year will only invest in debt assets that mature in one year or less.

A downside to FMPs is that they lock in your funds, and the returns depend on market performance. Therefore, it is always best to invest in FMPs if you are sure you won’t need the money before maturity. However, most FMPs carry very little risk and can still offer better returns than fixed deposits. 

3) Corporate Bonds & Non-Convertible Debentures (NCDs)

Both corporate bonds and non-convertible debentures are loans to a company but are slightly different in nature. 

Corporate bonds are issued by companies to raise capital and can be either secured (backed by company assets) or unsecured. They provide fixed returns with relatively lower risk and can also be traded on stock exchanges, making them highly liquid instruments. However, corporate bonds rely on the financial health of the issuing company. There is an underlying default risk in case the company fails to make interest payments or repay the principal on maturity. Additionally, their liquidity depends on factors like demand, market depth, and economic conditions.

NCDs, on the other hand, are a type of debt instrument that cannot be converted into equity shares. They generally offer higher interest rates than FDs, making them a great alternative if you’re looking for fixed returns. However, lower-rated bonds carry the risk of default. It is ideal to focus on AAA-rated bonds or research the issuer’s financial health before investing.

Both options can be considered as an alternative to fixed deposits but you must carefully research the company before investing in either option to safeguard your capital.

4) Government Bonds & RBI Floating Rate Bonds

Both government bonds and RBI floating rate bonds are two of the safest investment options, making them great fixed deposit alternatives. 

Government bonds are issued by the central or state government and offer a slightly higher return than FDs. 

The yield on government bonds varies based on their tenure and prevailing market conditions. As of January 2025, the yield for a 10-year government bond was approximately 6.7% per annum. On the other hand, leading banks offer FD interest rates ranging from 3.50% to 7.25% per annum for the general public. However, there is no Tax Deducted at Source (TDS) on government bond interest, whereas TDS may be applicable on FD interest if it exceeds certain thresholds.

Government bonds usually come with a 10-year tenure and offer periodic interest payouts, making them a good choice for stable returns and no market volatility. However, long-term government bonds are subject to interest rate risk (if sold before maturity).

RBI Floating Rate Bonds, on the other hand, are government-backed instruments with interest rates that reset every six months, ensuring your returns match the market rates. Unlike FDs with fixed returns, these bonds help you stay ahead of inflation. However, it should be noted that such bonds do not allow premature withdrawal (except for senior citizens). 

While both options provide security, government bonds offer flexibility in tenure, whereas RBI Floating Rate Bonds ensure dynamic interest rates for steady earnings.

5) Post Office Schemes

Post Office schemes are government-backed savings options that offer secure and steady returns, making them a reliable alternative to fixed deposits. 

Some popular options include the National Savings Certificate (NSC) for fixed returns with tax benefits, and the Senior Citizens Savings Scheme (SCSS), which provides higher interest rates for senior citizens above 60 (but its taxable interest should be compared with taxation rates of FDs). 

If you prefer flexibility, the Post Office Monthly Income Scheme (POMIS) ensures regular payouts, while Recurring Deposits (RDs) allow you to invest small amounts monthly. With guaranteed returns and government security, Post Office schemes are a great choice if you want stability with better yields than fixed deposits.

6) Equity Mutual Funds

If you are willing to take higher risks, you can explore different FD alternative mutual funds. Different types of equity mutual funds invest in the equity stocks of different companies, and your returns are based on how the stocks perform. Unlike fixed deposits, equity mutual funds can generate much higher returns but are always associated with market fluctuations. Also, these shouldn’t be considered short-term alternatives to FDs. 

You can choose from different types of equity funds based on your risk appetite. For example, large-cap funds are known for more stable returns, whereas mid-cap and small-cap funds are riskier but have a higher growth potential. Sectoral or thematic funds are a good choice if you want to invest in companies of a specific sector or theme. 

While all these funds carry market risks, investing with a long-term horizon and a diversified portfolio can help you maximise your returns with reduced risks. 

How to Choose the Right FD Alternative for You?

Before investing in any fixed deposit alternatives, make sure to thoroughly research them. It will help you understand the potential risks, returns and the nature of that investment. Based on this information, you can plan your investments wisely. Here are some additional factors you should consider before investing:

• Investment Goals: Understand your own investment goals to analyse if a particular investment option will work for you. Ask yourself if you want to invest for the long run or short term and the returns you expect to generate.
• Portfolio Diversification: A good investment strategy is to keep your funds diversified so your returns are stabilised in case of a volatile market or unpredictable behaviour. So, break down your investment into different categories.
• Capital: Depending on the amount you are willing to invest, your investment options shall also change. For example, you can start a SIP in an equity/debt mutual fund for as low as ₹500, but investment in corporate bonds generally starts at ₹10,000.

Given the evolving financial landscape of the country, it is essential to keep exploring your choices to find not just the best alternatives for fixed deposits but for every investment choice so you can maximise your returns. Make sure to thoroughly research any instrument before investing for a planned investment. 

Frequently Asked Question