The first step that you can take to secure your financial future is to start investing. However, the question that comes to every new investor’s mind is where should this start investing? With such a wide variety of options available for investing it can be challenging for anyone to choose where to start investing in the first place.

In India two of the most popular investment options are fixed deposits and the share markets. While both are great investment options their risk return profiles are very different. If you are finding it challenging to choose the right one for you, then read on. In this article we will try to find out the differences between the two so that you can make an informed choice about which one will suite you the best.

What is Fixed Deposit (FD)?

Fixed deposits are essentially deposit accounts from which you can earn a fixed rate of interest every year. In India you will commonly get fixed deposits issued by banks and other financial institutions with investment tenures of around a week to up to 10 years.

Normally fixed deposits carry interest rates higher than that of the interest on savings accounts in India. As of January 2023, the average fixed deposit rate for an investment of one year is around 6.75%. Since this is a relatively risk-free investment, many investors choose this to get a guaranteed return every year.

Another important aspect that you must remember is the guaranteed return is not the only attractive feature of his deposits. The principal amount that you invest is also ensured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to an amount of ₹5,00,000 per account holder per bank. This feature makes fixed deposits risk free to a large extent, add perfect for people, especially the senior citizens, who do not want to take much risk with their investments.

Finally, fixed deposits are available with every bank and financial institution. This makes them extremely easily accessible by everyone even in the remote areas of India. Also, anyone can open a fixed deposit with even a small amount of money. There is no need to accumulate a huge sum to be able to open fixed deposit.

What is Equity?

Another great way of investing money is buying shares of companies listed on stock exchanges like NSE and BSE. When you buy the shares of a company you become a shareholder which entitles you to receive a part of the profits of the company who shares you have bought. When the company does well performance well financially the share price also goes up. At that time, you can sell the shares and earn more profits.

However, you must remember that equity returns are not guaranteed. If the company does not do well, it will go into losses and the share prices will fall. Hence you must be prepared to face this risk when you invest in shares.

As per the Securities and Exchange board of India (SEBI), the regulator of equity markets in India, the average return from share markets over the last 20 years have been 12%. While this number looks very attractive you have to remember that this is an average, and not a year-on-year return. Some years have been good and some bad. Hence as an equity investor you must be prepared for these market related risks.

Differences between Fixed Deposit and Equity

Risk

As Already mentioned, investing in fixed deposits and equity markets carry completely different levels of risk. Fixed deposits offer guaranteed returns of 6-7% and a principal protection of up to ₹5,00,000.

There is no such guarantee for share investments and the price of the shares that you buy can fluctuate regularly based on some internal and external factors. However, you can earn high returns from your equity investments provided you invest in the right companies keep them for a long time.

Tenure

All fixed deposits mature after a specific tenure Which Ranges from 7 days to 10 years. You can choose the tenure at the time of investment. If you want to continue with the investment after the maturity date, then you will have to ask your bank to renew the fixed deposit.

In the case of equity investments, no such rules apply. You can buy a share and keep it for as long as you want.

Liquidity

In case of fixed deposits, you cannot withdraw the money that you have deposited till the end of the tenure that you have chosen. You can withdraw the investment prematurely only after paying a penalty. Hence fixed deposits are relatively illiquid investments.

On the other hand, equity investments are generally more liquid. You will find many buyers and sellers for the shares of most of the popular companies. This will allow you to exit your equity investments whenever you want and withdraw the money within just one day.

Inflation

Since the return from fixed deposits are fixed, they do not go up when inflation increases. Due to this inflation can erode to returns very easily. In other words, the real return that you will earn from fixed deposits can be much lower than the nominal rate of interest you will earn.

For example, if you I have interested in a fixed deposit carrying interest rate of 6% and inflation rate is 5%, then the real return you will earn is going to be (6% – 5%) = 1%.

Equity investments on much better in this respect if you want to beat the inflation. In the same example above, if the average return from equity is 12% and inflation is 5%, then you will earn real return of (12% – 5%) = 7%.

Conclusion

The decision of where the two invest in fixed deposits or equity will be completely dependent on the market conditions and your risk appetite. Fixed deposits are excellent as instruments that provide decent returns at one of the lowest risks possible. However, if you have the appetite to digest some risk, then we highly recommend that you look at equity investments.

Happy Investing!

This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.