At a time when interest rates have nose-dived and stock markets are up, a substantial chunk of investors continue to be drawn towards the good old fixed deposits. Fixed deposits that offer an assured return and relatively higher safety continue to be a preferred investment avenue for households. Sadly this defies rationale. An investor’s portfolio should incorporate necessary changes taking into account changed market conditions and availability of newer options.

Not attractive enough

Fixed Deposits	1-Yr	3-Yr
HDFC Ltd	7.55%	8.05%
HDFC Bank	7.50%	7.50%
State Bank of India	7.00%	7.50%

(FD rates as on August 2002)

Let us look at factors, which continue to lure investors towards FDs. The first being convention, when our grandparents had spare funds to invest they used FDs, our parents did the same, so do we. Investing in FDs has become a ritual for most households.

Second the safety factor. The bank where you invest your funds is a place where you have been transacting for years plus you know how much return you will get on maturity. As a result dealing with them puts you in a comfort zone despite lower returns.

Finally the alternative investment options, which match your profile like mutual funds seem too confusing. A fancy sounding name followed by terms like income fund, growth funds is completely alien to you. So why take the risk of venturing into newer areas?

But the trouble is that all the abovementioned reasons for investing into FDs are keeping you that much farther from achieving the financial goals you have set for yourself.

So does this problem have a solution? Can you continue to be risk averse and yet earn higher returns vis-à-vis what your FD offers? The answer is - Yes! Income schemes offered by leading mutual funds have consistently offered better returns than FDs as seen in Table 2.

A more rewarding option

Income (LT) Schemes	NAV (Rs)	1-Yr	3-Yr	Inception
SUNDARAM BOND A	20.75	14.0%	14.7%	13.7%
HDFC HIGH INTEREST G	22.12	13.0%	14.6%	13.2%
TEMPLETON INC G	22.85	12.8%	14.2%	13.7%
MAGNUM INCOME G	17.8	12.7%	13.9%	12.9%

(NAVs as on August 13th, 2003.Growth over 1-Yr is compounded annualized)

The above table clearly indicates that higher returns have been offered by Income schemes from the same sponsors. With a softer interest rate policy being adopted by the Reserve Bank of India, similar results can be expected in the medium term period as well.

This is a view echoed by industry experts like Mr. Sivakumar (Sundaram Mutual Fund, Fund Manager-Debt). A distinct advantage income schemes possess is the liquidity part. Investors have the choice to exit anytime they want to.

Now let us revisit the reasons for investing in FDs and see if they still hold good. The first, convention; most prudent investors would agree that this factor is irrelevant when returns are being considered. If your investments fail to generate the kind of returns you need, then it is time to move on and consider different options.

The second factor, safety levels; by investing in income funds and bearing a slightly higher risk (from interest rate volatility) the investor is rewarded with considerably higher returns. Income funds, which invest in bonds, government securities and other fixed income instruments, provide a high degree of safety.

Finally lack of awareness. Present day markets have led to emergence of a breed of investment advisors. These are individuals whose expertise lies in creating customised solutions for individuals based on their risk profiles. Armed with comprehensive knowledge of investment avenues these individuals can be delegated the task of creating a viable investment plan for you.

Ignorance cannot and should not be a reason for not achieving your long-term financial goals. Remember we are talking about your money.

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