We periodically review the landscape of fixed income and debt investments available to answer the question, can investors get better returns than FDs for comparable risk? We did the first review of the fixed income landscape in Dec 2020: FDs suck, what next? Exploring alternatives to Fixed Deposits.
In our April 2022 update of the fixed income landscape, we found eight fixed-income investment options that offer better returns than the best FD rates in India.
The case against Fixed Deposits
For decades, Fixed Deposits have been the most preferred instrument for everyone. But, historically, this is the worst time to invest in FDs. Their interest rates are at a multi-year low. The nationalized banks like SBI, Punjab National Bank, HDFC Bank, and Axis Bank offer FD rates in the range of 4.4% to 5.8% per annum, depending on your tenure, and a 0.5% higher for senior citizens.
On the other side, the CPI inflation for Feb 2022 was at 6.07%. This means your real rate of return is negative. You are losing your purchasing power by investing in Fixed Deposits.
The alternatives we will discuss are categorized into three risk buckets.
- No-Risk
- Lower or equal risk to FDs
- Higher Risk than FDs
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Risk category: No-Risk / Sovereign Risk
This is the list of alternatives where you can invest for better returns without taking any additional risk than Fixed Deposits. For that matter, these are way safer than any bank’s FD. Because you are lending money to the Government, they have a sovereign rating.
1. PMVVY Scheme
PMVVY is a government-subsidized pension scheme for senior citizens. It currently provides an assured return of 7.66% pa. The interest rates vary according to interest payouts (Yearly, Half Yearly, Quarterly, or Monthly).
The minimum purchase amount is 1.56L & maximum is 15L. You can lock the high-interest rate for ten years. There is no tax benefit for the scheme. The individuals are taxed at applicable rates, and TDS is not deducted. You can invest in PMVVY via LIC India.
2. Senior Citizens Savings Scheme
It is a government-backed savings scheme that was launched in 2004. The primary objective is to enable senior citizens to ensure a regular flow of income.
As the name suggests, it is only eligible for senior citizens. The interest rate has been set as 7.4% pa as of today. The minimum investment is 1000 & the maximum investment is 15 Lacs per individual. Interest payout is every quarter.
Maturity tenure is for five years with a one-time option to extend for three more years. So, in total, it will be eight years. You can invest in this scheme from any authorized bank or post office.
3. RBI Floating Rate Bonds
RBI has launched a floating rate savings scheme in July 2020, which has a maturity of 7 years. The interest on the bond is linked to National Savings Certificate. It offers an NSC + 0.35% rate of return.
The current interest rate of NSC is 6.8%, and you add 0.35% to it. So RBI Floating bonds will give a 7.15% interest per annum. You can invest in RBI Bonds from select banks like HDFC Bank, Axis Bank etc. or via brokers like ICICI Direct and HDFC Securities.
4. Government Securities
G-Secs are issued by the Government of India with various maturities (from 91 days to 40 years). The interest rate depends on maturity. The minimum investment is 10,000, and the maximum is 2 Cr per PAN. You can invest in G-Secs via the RBI Retail Direct platform or brokers like Zerodha.
Risk category: Low or equal risk as FDs
The below names will carry lower or, in some cases, equal risk when compared to Fixed Deposits. Some of these are bonds issued by Public sector companies. In adverse cases of stress, Daddy (GoI) will come to the rescue.
5. PSU Tax-Free Bonds
Major Public sector companies like PFC, HUDCO, NHAI, NTPC, NABARD, etc., had issued tax-free bonds from 2010 to 2015. These are traded in the secondary market and yield anywhere between 4.5% to 4.9% or higher.
They are AAA bonds & provide good liquidity. You can check with your broker/market maker for large quantities and get a better yield. Please note that you are not required to pay any tax on the interest received from these bonds, unlike others.
6. Savings account of Equitas and AU Small Finance Banks
Equitas Small Finance Bank offers a 7% interest rate on Savings accounts with a balance above 5L up to 2 Cr. Alternatively, you can also open a Niyo X (a Neo bank) account, which will open an Equitas bank account along with all the features of new-age banking.
Along similar lines, AU Small Finance Bank is also offering a 7% interest rate on Savings accounts with a balance above 25L up to 1 Cr.
But how safe are these Small Finance Banks? Before that, let’s try to understand DICGC.
Deposit Insurance and Credit Guarantee Corporation is a wholly-owned subsidiary of RBI. It provides insurance to the depositors up to a limit of 5 lakh per account holder per bank. It works as a protection cover for bank deposit holders when the bank fails to pay its depositors. Basically, it is like RBI saying to the depositors, ‘Hey, if shit hits the fan. We cover you up to 5 Lacs’. Both Equitas and AU bank are covered under DICGC.
Equitas Small Finance Bank interest rate
AU Bank interest rate
- Read our post on How safe is AU Bank?
Risk category: Higher Risk than FDs
The names we are going to discuss bear some risk and can even lead to capital loss. You have to be very choosy here. There is no capital protection in this instrument. Please check with your financial advisor before investing in these instruments.
7. High rated Corporate Bonds
Many private companies and NBFCs will raise money from the markets by issuing Debentures, Commercial papers, etc. Based on the risk profile of the company, they trade anywhere between 6.5% to 8.5% or more, depending on the liquidity and financial situation of the company.
A word of caution:
Dealing with corporate bonds is tricky. The underlying company may look great from the outside. But the cockroaches can only be found if we look deeper. Debt markets are always a lead indicator for what the company is going through. If the bonds of a particular company are trading at an exorbitant yield, it would be better for retail investors to stay away from it.
8. INVITs and REITs
In recent times InvITs and REITs have gained popularity among investors. They offer retail investors the opportunity to invest in alternate asset classes like Real Estate, Power Plants, Roads, etc.
They are a mix of both Debt & Equity. The regularity of dividend payments gives it a touch of a debt instrument. At the same time, the unitholder participates in the company’s growth trajectory, much like an Equity investor.
There are 3 INVITs and 3 REITs listed in India. The Dividend Yield is in the range of 5.4% to 8.5% for different companies.
*Click on the image to enlarge
- Read our post on Which is the best REIT in India?
- A detailed post on BIRET, Power Grid InvIT, Mindspace REIT, Embassy REIT
Overall,
The search for yields is at its peak. It is time to look for alternatives. At the same time, we shouldn’t compromise on RISK. These instruments provide you with:
- Regular interest payments
- Sovereign & PSU credit rating
- Relatively better interest
This post is for informational purposes only. Before investing in any of the above mentioned products, check with your financial adviser about their suitability for your needs.
Disclosure: Some of the instruments discussed are part of the Capitalmind Premium Fixed Income Portfolio. Capitalmind Premium subscribers get access to the CM Fixed Income Portfolio and our equity portfolios and active strategies.
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