One investment avenue that continues to attract investors, albeit in smaller numbers, despite the fall in interest rates is the fixed deposits offered by companies and banks. The ‘assured’ return and the low risk nature of such deposits continue to be the main drivers of this interest.

The main feature of corporate deposits is that the rate of interest offered is higher than the bank deposit rate. The reason for this can be attributed to the risk attached to such deposits. Corporate deposits are unsecured and are therefore more risky compared to bank deposits, which have a very low risk of default. Investors willing to take some risk for higher returns turn towards corporate deposits.

Bank FD Vs Manufacturing FD

	1 Year	2 Years	3 Years
State Bank of India	5.50%	5.75%	6.00%
Jindal Steel & Power Ltd	8.00%	8.50%	8.50%

Bank deposits being lower in risk, offer lower interest rate. A risk-averse investor would definitely go for such deposits.

However, there are two key disadvantages that one is faced with while investing in fixed deposits.

One, fixed deposits are not very liquid. The investor cannot withdraw his money during the term of his deposit. In case he wants to make pre-mature withdrawal he has to pay a penalty. For instance, the penalty charged by HDFC Ltd. (AAA-rated) for its fixed deposit is as follows:

Months completed	Rate of Interest Payable
3 - 6 months	No interest
6 - 12	5.00% p.a.
Till Maturity	1% less than the rate applicable for the period completed

Two, fixed deposit schemes offered by most institutions today is that the ‘real’ return that is earned is actually negative i.e. the value of the rupee is depreciating faster than you are able to grow it!

HDFC FD’s Real Return

Period (Months)	12-23	24-35	36-84
Interest Rate Offered	6.25%	6.50%	6.75%
Less: Inflation Rate	6.00%	6.00%	6.00%
Real Rate of Interest	0.25%	0.50%	0.75%

An alternative to fixed deposit that comes to mind is mutual funds, especially the income funds. Mutual funds do away with one of the biggest drawbacks of fixed deposits i.e. liquidity. An investor can exit from the fund anytime he wants. Also the income funds rate low on risk and default. The returns offered by most of the well managed funds are higher than the company or bank deposits. Thus, an investor who is willing to take some risk or rather divert the risk associated with corporate deposit towards the income funds can enjoy the benefits of income funds as well.

Leading Income Funds Vs Fixed Deposits

	1-YR	3-YR	5-YR	INCEPTION
JM INCOME G	13.30%	14.70%	14.60%	12.20%
TEMPLETON INC G	13.10%	13.20%	13.50%	13.80%
SUNDARAM BOND A	14.20%	13.50%	14.00%	13.70%
ZURICH I HIGH INT G	13.40%	13.70%	13.10%	13.40%
HDFC Ltd. (Fixed Deposit)	6.25%	6.50%	6.75%	-
Jindal Steel & Power Ltd (Fixed Deposit)	8.00%	8.50%	-	-

(In case of mutual funds, growth over 1-Yr is annualized)

With inflation hovering around 5.5-6% the real rate of return is dismal in the case of FDs. Income funds try to give a return that not only compares favourably to that of an FD, but also performs well on the ‘real return’ criterion. Investors who have been investing largely in FDs so far need to consider this fact before making their next FD investment. Investors who draw comfort from the ‘assured returns’ of FDs, must realize that they are in fact ‘losing’ money due to inflation. To get around this, risk-averse FD investors can consider investing smaller amounts in income funds with a consistent track record to clock higher growth.

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