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Investment Insight

FD Alternatives in India

Deepshikha Nainani Posted on May 16, 2025

Table of Content

Overview

Fixed deposits are safe, but they often give low returns and limit your financial flexibility. If you want better returns than FD and more control over your money, you need to consider a smarter alternative to an FD. Options like mutual funds, government-backed schemes, and bonds can offer you higher growth, tax savings, and better access to your funds. These FD alternatives in India also help you reduce risk by spreading your money across different types of investments. By choosing wisely, you can make your money work harder without losing peace of mind. Missing these options could mean missing real opportunities to grow your wealth.

Alternatives to Fixed Deposits

Choosing FD alternatives can help you earn better returns, enjoy greater flexibility, and protect your savings from losing value over time. Here are some secure and rewarding options you should consider:

Debt Mutual Funds

Debt mutual funds invest in fixed-income instruments like government bonds and corporate debt, offering higher returns than fixed deposits with controlled risk. They suit you if you want steady returns without exposing your money to large market movements. With better tax treatment for long-term holdings, debt mutual funds can be the best alternative for an FD in India if you want to grow your wealth efficiently.

Liquid Funds

Liquid funds invest in short-term, high-quality securities and offer easy access to your money with no lock-in period. They usually provide higher returns than savings accounts while maintaining low risk. Liquid funds are ideal if you want a safe place to keep emergency funds or surplus cash without compromising on liquidity.

Government Bonds

Government bonds are backed by the Government of India and provide a secure way to earn predictable returns over the long term. They generally offer slightly better returns than fixed deposits while carrying very low risk. However, their longer investment periods mean they suit investors who prioritise capital safety over immediate liquidity. These bonds serve as a reliable alternative to an FD, especially for conservative investors.

Fixed Maturity Plans (FMPs)

Fixed Maturity Plans are closed-end mutual funds that invest in fixed-income securities that mature at the same time as the plan. They offer better returns than fixed deposits when held till maturity and help reduce interest rate risks. FMPs are suitable if you have a defined investment horizon and do not need access to the funds before maturity.

Public Provident Fund (PPF)

The Public Provident Fund is a long-term savings scheme offering tax-free interest and strong capital protection. It provides higher returns than fixed deposits and qualifies for tax benefits under Section 80C. With a 15-year maturity period, PPF is an excellent choice if you want safe, long-term growth and tax savings.

National Savings Certificate (NSC)

The National Savings Certificate is a five-year government-backed investment that offers steady returns and tax benefits. It suits conservative investors who want safe, medium-term investments with the advantage of Section 80C deductions. NSC helps you build a secure savings base while improving your overall portfolio stability.

Senior Citizens Savings Scheme (SCSS)

The Senior Citizens Savings Scheme is designed for individuals aged 60 years and above, offering one of the highest interest rates among government-backed savings options. It provides regular income, capital security, and tax benefits under Section 80C. SCSS is a strong option for retirees who seek a reliable and safe income source.

Corporate Fixed Deposits

Corporate FDs are term deposits offered by companies and usually pay higher interest than traditional bank FDs. These are suitable if you want better returns and are willing to accept slightly higher risk. Always check the credit rating of the issuer to ensure safety and avoid low-rated deposits.

Post Office Monthly Income Scheme (POMIS)

The Post Office Monthly Income Scheme gives you fixed monthly income from your one-time investment, backed by the government. It suits you if you want a steady income with low risk and don’t need your money immediately. With reliable returns and safety, POMIS is a good option for retired individuals or low-risk investors.

Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds are issued by the Government of India and give you returns linked to gold prices along with 2.5% annual interest. They suit you if you want to invest in gold without holding it physically and get tax-free returns at maturity. SGBs are ideal for long-term investors who want both diversification and capital growth.

Recurring Deposits (RDs)

Recurring Deposits let you save fixed amounts regularly, making them ideal if you can't invest a lump sum upfront. They offer similar safety as FDs and help you build a habit of disciplined saving. RDs are best suited for individuals with regular income who want guaranteed returns without taking any market risks.

Reasons to Look Beyond Traditional Fixed Deposits

Fixed deposits offer safety and predictable returns, but they may not meet all your financial needs in today’s changing economy. Here are key reasons why you should consider better alternatives:

Limited Growth Potential

FDs offer fixed returns, but these are often too low to beat inflation. Over time, the real value of your money may fall, which reduces your purchasing power. By choosing investments with better returns than FD, you can grow your money faster and stay ahead of rising costs.

High Tax Burden

Interest earned on fixed deposits is fully taxable as per your income slab. This can significantly lower your actual returns, especially if you fall in a higher tax bracket. Tax-saving FD alternatives like PPF and debt mutual funds with indexation can help you retain more of your income.

Low Liquidity

Most fixed deposits come with a lock-in period, and withdrawing early can lead to penalties or reduced interest. This limits your ability to access funds during emergencies. Options like liquid funds or short-term debt instruments offer more flexibility without major losses.

Lack of Diversification

Relying only on fixed deposits can leave your portfolio unbalanced and vulnerable to changes in interest rates or inflation. Diversifying across asset classes like mutual funds, bonds, or gold helps spread risk. It also improves the overall performance and resilience of your investments.

Changing Economic Environment

Interest rates, inflation, and market conditions are constantly evolving. Fixed deposits may not adapt quickly to these changes, which can reduce their effectiveness over time. Choosing flexible alternatives allows you to respond to economic shifts and make better financial decisions.

No Protection Against Long-term Goals

FDs may work for short-term savings, but they often fail to support long-term goals like retirement, buying a house, or funding your child’s education. The limited growth restricts your ability to accumulate enough wealth. Alternatives like PPF, mutual funds, or bonds are better suited for long-term planning with higher compounding benefits.

Inflation Risk

Fixed deposit returns are usually lower than the inflation rate, especially in high-inflation periods. This means your money earns interest, but its real value decreases over time. Investments that offer inflation-beating returns help protect your purchasing power and maintain financial stability.

Missed Opportunity for Passive Income

FDs pay interest at fixed intervals, but they don’t offer flexibility in generating consistent passive income streams. Alternatives like debt funds with regular payouts or POMIS can give you a more customisable and steady monthly income. This helps you manage everyday expenses better, especially after retirement.

Better Options for Young Investors

Younger investors have time on their side and can take calculated risks for higher returns. Sticking to FDs early in life can limit your wealth-building potential. Alternatives like SIPs in debt or balanced mutual funds offer better returns and help build financial discipline.

How to Choose the Right Alternative

Selecting the right fixed deposit alternative depends on your goals, risk comfort, and how soon you may need the money. Here are key factors to help you make a better choice:

Know Your Risk Tolerance

Different investments carry different levels of risk. If you are risk-averse, safer options like government bonds or PPF may suit you better. If you can handle moderate risk, options like debt mutual funds may offer better returns than FD.

Define Your Financial Goals

Start by identifying what you want from your investment—steady income, long-term growth, or capital protection. Match your goal with the right product to avoid future regret. For example, liquid funds work for short-term needs, while PPF suits retirement planning.

Check Liquidity Needs

Think about how easily you need access to your money. If flexibility matters, choose options without lock-in periods like liquid funds or ultra-short-term debt funds. Avoid long-tenure instruments unless you're certain you won’t need the money early.

Compare Expected Returns

Review the average returns offered by each alternative, both current and past. Some options may perform better than others depending on interest rate trends. Look for investments that have consistently offered better returns than FD over time.

Understand Tax Impact

Tax rules can reduce your final earnings, especially in fixed deposits where the interest is fully taxable. Choose tax-saving alternatives like PPF, ELSS, or long-term debt funds with indexation benefits to increase your net returns.

Match the Tenure with Your Timeline

Always align the investment period with your goal. For example, if you need the money in five years, avoid locking it in for fifteen. POMIS or NSC could suit medium-term needs, while liquid funds serve short-term plans better.

Diversify Your Portfolio

Don’t put all your money into one product, even if it seems safe. Spread your investment across different types like bonds, mutual funds, and gold. This reduces risk and improves the balance of your overall financial plan.

Check Fees and Charges

Hidden fees can eat into your returns over time. Before investing, check for management costs, exit loads, or service charges. Lower-cost options often deliver better long-term value for the same level of risk.

Verify the Credibility of the Issuer

Always check the reliability of the institution offering the investment. For corporate FDs or non-government schemes, review credit ratings and background. Trustworthy issuers reduce the risk of delays or defaults.

Keep Yourself Updated

Markets change, and so should your investment choices. Review your portfolio regularly to make sure it still meets your needs. Being informed helps you take better decisions and adjust when needed.

Frequently Asked Questions

FD Alternatives

What are the best short-term alternatives to FDs?

For short-term goals, consider low-risk options that offer higher liquidity and better returns than a savings account. Top choices include:

Liquid funds – Ideal for parking funds with easy access and no lock-in
Ultra-short-term debt funds – Suitable for slightly better returns with limited volatility
Money market funds – Good for short-term stability and quick withdrawals

Is a Mutual Fund better than an FD offered by banks?

Mutual funds can offer higher returns than FDs, but they also carry market-linked risks. FDs provide fixed, predictable interest with capital protection. Choose based on your risk comfort and return expectations.

Where can I invest in the best FD alternatives?

You can invest through trusted banks, post offices, or government portals for schemes like PPF and NSC. Many online platforms offer easy access to mutual funds and bonds.

Do I get a tax benefit for investing in FDs and their alternatives?

Yes. Tax-saving FDs offer deductions under Section 80C. Alternatives like PPF, NSC, and ELSS mutual funds also qualify for 80C benefits. Interest on PPF is tax-free, while others may have partial exemptions.

Hi! I’m Deepshikha Nainani

Blogger

Deepshikha is a marketing and communications expert with over a decade of experience across various industries. With expertise in performance content, digital campaigns and brand management, she excels in creating data-driven, creative solutions that drive growth and engagement. Holding certifications in digital marketing and content strategy, she is passionate about combining creativity with analytics to create compelling marketing narratives that resonate. During her downtime, Deepshikha enjoys watching films and documentaries, listening to music, cooking and traveling.