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FD vs Stocks: Which One Should You Choose?

Every investment has advantages and disadvantages. Finding a balance between them and ensuring that you get the most out of your money is important.

Brand stories Updated: Mar 23, 2017 15:43 IST
Bajaj Finserv

(Bajaj Finserv)

Fixed deposit is an investment plan where you invest a sum of money in a bank for a set period (tenure) with a specific rate of interest. This is one of the most common investment approaches among the public, due to the low risk it carries.

Let’s look at some of the key pros and cons of fixed deposits:

Pros:

1. Low Risk: FDs are the most risk-free investment you can invest in. Your money grows at a steady rate and there is zero fluctuation.

2. Assurance: The tenure period is preset. This makes it a locked asset that you won’t break.

3. Tax Benefits: You can reduce your taxable income by investing in fixed deposits.

Cons:

1. Lower Earnings: Compared to other investment options, FDs give low returns. On average, the rate of interest is 8-9%. Although it’s risk-free, the earnings are mediocre at best.

2. The Effect of Inflation: In 2016, inflation was 4.97%. This factor should be taken into account when making an investment. Inflation tends to nullify the growth of wealth. That’s why it’s important for your money to grow at a rate above the inflation rate.

When compared to inflation, FDs don’t offer good returns. They’re just a decent investment that offers security at the most.

3. Taxable: In spite of having tax benefits, FDs don’t entirely save tax. The returns you get after maturity are taxable. This means you won’t get the full benefit of your investment. This is a major drawback.

4. Low Liquidity: FDs come with a lock-in period. This takes away the flexibility in your investments. Investors are restricted once they open an FD. They can’t change to other forms of investment with their money. A premature withdrawal has two side effects. First, you’ll be charged a fee for pre-closure. Second, the interest rate will reduce. Both are losses that must be avoided.

Stock or equity is the ownership of shares in a company or business. Let us now examine the pros and cons of investing in stocks.

Pros:

1. Highest Returns: Among all investments option, equity/stocks are the best, as the average returns in a systematic manner is 12-15%. Some good investors are able to reach numbers up to 20%.

2. Liquidity: Another advantage with stock investment is that you can withdraw your money anytime you want. Good investors reallocate their stocks as per market trends. You can alternately reinvest through another approach if prospects are good.

This flexibility works better in the long run. It lets you keep control over your money.

3. Tax-free Dividend: Many companies give out regular dividends on stocks. This is a great way to generate an alternate income. The best part is that it’s not taxable. In general, companies that give out regular dividends tend to perform better.

4. Defeat Inflation: You generally buy a stock when its value is low. You sell it when the value is higher. With returns being high, stocks are a great option to beat inflation significantly.

Cons:

1. Highest Risk: Equity is the least secure investment. But with some strategic planning and proper management, this can be avoided to an extent. If you’re extremely risk averse, it’s better to avoid equity. If you still want the benefits that it offers, invest a small amount and have other channels to back you up.

2. Reallocation: Equity funds don’t perform all that well. You leave them to mature like FDs and PFs. These funds should be monitored regularly.

According to market fluctuation, certain funds might not perform well. In those times, you should reallocate these funds to a more profitable organisation. This keeps the growth curve positive and ensures your money grows one way or another.

This isn’t easy and requires regular monitoring and taking right calls at the right time.

FD and equity both have their own merits and demerits. It’s up to you to choose what suits you best. If you’re looking for a steady, risk-free, and hands-off investment then FD is a good choice. But, if you’re looking for exponential growth in wealth and are ready to take a risk, equity may be the best bet for you.