When discussing a ‘safe’ investment, most Indians often turn to fixed deposits (FDs). The reasons are pretty simple. Fixed deposits offer security and negligible risk. While FDs offer stability, their returns might not be the best. Sometimes, FD returns don't even beat inflation. That’s where people look for alternatives. And why not? It is wise to re-evaluate your investment strategy to earn better returns. In this blog, we will delve into different alternatives to FD that strike a risk-reward balance! A corporate bond is a financial instrument that serves as a loan to corporations by investors. These funds meet the company’s business requirements, ranging from a plant acquisition to expansion. In return, investors are paid fixed returns for predetermined tenure. Advantages Of Corporate Bonds Limitations Of Corporate Bonds A mutual fund is an investment company that pools money from many investors to invest in stocks, bonds, and other investment options. A professional fund manager manages it. The AUM of the Indian mutual fund industry has witnessed a 5-fold increase in the past decade. Advantages Of Mutual Funds Limitations Of Mutual Funds1. Corporate Bonds
2. Mutual Funds
- Market Risk: Returns in mutual funds are subject to market fluctuations. On the other hand, FD provides fixed returns regardless of market volatility.
- Costs: Mutual funds may have management fees and involve an expense ratio. There are no costs associated with FDs apart from penalties in case of early withdrawal.
- Lack Of Control: Investors have limited control over securities, bonds, and other investments selected within the fund’s portfolio.
3. Securitised Debt Instruments (SDIs)
SDIs are formed by pooling several underlying assets into an interest-bearing security. The underlying assets can be loans, lease agreements, invoices, etc. It is an emerging alternative fixed-income opportunity in India for retail investors. Grip Invest offers a variety of SDIs like BondX, LeaseX, LoanX, and InvoiceX.
Advantages Of SDIs
- Higher Returns Than FDs: Investors can easily generate up to 16% IRR by investing in SDIs.
- Fixed Non-Market Linked Returns: The returns are fixed and are not subject to market ups and downs.
- Diversification: Investors can invest in a pool of underlying assets that is further diversified across categories; for example, BondX is a collection of many investment-grade rated bonds from a curated set of issuers.
- Security Cover: Most SDIs involve security measures in the form of over-collateratisation, cash collateral, excess interest spread (EIS) etc., to cover the credit default risk.
Limitations Of SDIs
Default Risk- There is a risk of default on payments by the originator.
- Low Liquidity- Selling SDIs in the secondary market is challenging.
- Complexity- The structure of SDIs can be complicated to understand for individual investors. Here, online investment platforms are essential in due diligence and assisting investors.
4. Fractional Commercial Real Estate (CRE)
Fractional CRE investment allows investors to own a part of the commercial property and receive fixed returns in proportion to their investment. These investments are usually made in Grade A properties like office spaces, shopping malls, etc.
Advantages Of Fractional CRE
- Low Entry Costs: Investors can participate in fractional CRE with a lower initial investment. It can start from as low as INR 1 lakh.
- High Stable Income: Generates a consistent stream of rental income from tenants, yielding up to 12% yield.
- Professional Management: Investors are relieved of day-to-day management. Fractional CRE often come with professional property management.
- Potential Capital Appreciation: Property values can increase over time, leading to capital gains.
Limitations Of Fractional CRE
- Limited Control: Fractional investors have limited control over decision-making related to the property.
- Default Risk: This investment is subject to default on rental payments.
- Fees And Costs: Certain costs may be associated with fractional ownership platforms. It can include management fees, transaction costs, etc.
5. Public Provident Fund (PPF)
PPF is a government-backed long-term investment option for risk-averse investors to earn fixed interest rates decided every quarter by the Finance Ministry. The minimum tenure of a PPF account is 15 years, extendable in blocks for five years after that.
Advantages Of PPF
- Tax Saving: PPF qualifies for an exempt-exempt-exempt (EEE) scheme where the amount invested, the interest received, and the maturity amount is tax exempt. The tax deductions are available for a maximum amount of INR 1.5 lakhs per year under Section 80C of the Income Tax Act.
- Flexible Investment Frequency: The deposit can be made in a lump sum or instalments without restriction on the number of instalments per financial year.
- Partial Withdrawal: The PPF amount can be partially withdrawn from the seventh financial year.
Limitations Of PPF
- Lock-In Period: PPF has a minimum lock-in period of 15 years.
- Fixed Interest Rates: PPF is a fixed return scheme and may not generate the highest returns in the growing economy.
Conclusion
In the constantly evolving economic landscape, investing only in fixed deposits is insufficient to beat inflation and build wealth. Therefore, exploring higher-paying, predictable alternatives to fixed deposits is necessary. Also, an investor should diversify in various investment avenues like FDs, corporate bonds, SDIs, fractional real estate, PPF, etc, while building their investment portfolio.
At Grip Invest, investors can explore new-age alternative fixed-income options (SDIs and corporate bonds). These curated, listed, and credit-rated options are designed to fetch better risk-adjusted returns.
Frequently Asked Questions
1. What is an expense ratio?
It is the fees charged for maintenance by mutual funds. This number depends on the size of the fund.
2. Can investors withdraw investment in SDIs before maturity?
SDIs are tradable instruments in the secondary market and can be traded before maturity. However, liquidity may be an issue.
3. Can I invest in corporate bonds through the exchange?
Yes! With RFQ integration on OBPPs like Grip Invest, you can easily place an order via exchange.
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Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip Invest”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip Invest or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/.
Registered Address - 106, II F, New Asiatic Building, H Block, Connaught Place, New Delhi 110001.
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