Fixed Deposit (FD) vs Stock Market

Last Updated: 3 Apr 2024

to risk appetite and return expectations, many aspects influence the decision to choose an appropriate avenue. Among the plethora of avenues for investments, Fixed Deposits (FDs) and the stock market stand out as popular choices. Let us consider FD vs stock market to determine which would be the right option for you.

An Overview of Fixed Deposits

FDs involve depositing a specific amount of money for a predetermined period at a fixed interest rate. At the end of the term, you will receive the initial investment or principal amount along with the interest it has earned.

Benefit of FDs

Investing in a fixed deposit offer several advantages:

• Safety:
  FDs are recognized for their low-risk nature. They are ideal for those looking to earn interest without significant exposure to market fluctuation risks.
• Predictable earnings:
  They offer guaranteed returns at a set interest rate. So, these assets allow you to plan your financial objectives efficiently, even if you’re just starting out.
• Accessibility:
  FDs stand out for their simplicity and they require minimum financial expertise. So, fixed deposits are also suitable for people with limited investment experience. Retired individuals can also consider fixed deposits to be a safe investment option.

Risks Associated with FDs

Some cons of these investments include:

• Inflation Impact: Fixed deposits can sometimes fall short of outpacing inflation. It can decrease the actual value of returns in the long run.
• Low Returns: While FDs offer stability and security, they generally provide lower returns compared to riskier investments. So, you might be missing out on opportunities for higher growth.
• Lock-in Periods: You will have to keep your funds in a fixed deposit for a specific time. You are likely to suffer penalties for premature withdrawals. Therefore, FDs prevent access to funds in case of emergencies.
• Taxation: Interest earned from fixed deposits is subject to taxation. The post-tax returns of individuals in higher brackets get severely impacted.

An Overview of Stock Market Investments

The stock market acts as a platform for individuals to buy or sell shares of various companies listed publicly. Although this market carries potential risks, it also offers the chance for significant returns. Many individuals, particularly in India, have turned to the stock market as a means of building wealth and protecting their financial future.

Benefits of Equity Investments

Investing in the share market offers the following advantages:

• Appreciation of Capital: Stocks can yield substantial capital gains in the long run. Selecting the right shares can lead to significant profits that surpass traditional investment returns.>
• Building Wealth: Historically, the stock market has served as a key driver of long-term wealth accumulation. It appeals to investors willing to take on higher levels of risk.
• Diversifying Investment: The stock market provides access to a vast array of industries and companies. This enables investors to diversify their portfolios, reducing their overall risk.

Differences Between Fixed Deposits and the Share Market

Let us consider some major distinctions between the FD and stock market.

 

Criteria	Fixed Deposits	Share Market
Returns	Low and predictable	Variable and higher
Risk	Low	High
Liquidity	Limited because of fixed lock-in periods and penalties for premature withdrawal	Usually liquid but depends on market hours
Investment horizon	Short to medium	Long
Capital Appreciation	Limited	High growth potential
Required Knowledge and Expertise	Minimal	Extensive
Emotional Impact	Not too high	Easily influenced by emotions
Taxation	Pay taxes on interest	Pay taxes on capital gains
Diversification	Limited	High potential
Ideal for	Risk-averse investors with short-term goals	Long-term investors with high risk tolerance

Risks Associated with the Share Market

Some cons of investing in the stock market include:

• Market Volatility: Due to fluctuating values, the worth of your investments in the share market keeps changing.
• Potential Losses: There’s a chance of losing some or all your investment if the value of your stocks decreases. Fixed deposits offer more security because the bank or NBFC guarantees the principal and returns.
• Requires Expertise: Successful stock investing often requires in-depth knowledge, research, and analysis of individual companies and market trends.
• Emotional Discipline: Share market investing can trigger strong emotions. Therefore, investors end up making impulsive decisions during fluctuations.

Mitigating Risks in the Stock Market

Diversification

One key strategy to mitigate risks in the stock market is diversification. By spreading investments across various sectors and asset classes, investors can reduce the impact of any single stock’s poor performance on their overall portfolio. For instance, investing in stocks from different industries like technology, healthcare, and consumer goods can help offset losses in one sector with gains in another.

Risk Assessment

Conducting thorough research and analysis before investing is crucial. Understanding the financial health, management competence, and market position of a company can help assess its risk level. Additionally, considering macroeconomic factors such as interest rates, inflation, and geopolitical events can provide insights into broader market risks.

Stop-loss Orders

Implementing stop-loss orders can limit potential losses by automatically selling a stock if it reaches a predetermined price. This helps prevent emotional decision-making during market fluctuations and ensures disciplined risk management.

Regular Monitoring

Continuously monitoring investments allows investors to stay informed about changes in market conditions and company performance. By staying vigilant, investors can promptly respond to emerging risks and adjust their portfolios accordingly.

Hedging Strategies

Employing hedging strategies such as options contracts or futures can provide protection against adverse market movements. While these strategies may involve additional costs, they offer insurance against potential losses, especially during periods of heightened volatility.

What Should You Choose?

While comparing FD vs. share market to pick the right option, you should consider the following:

Financial Objective

Before making any investment decisions, assess your financial goals and the time frame for achieving them. If you have short-term objectives, consider less risky options like fixed deposits for stability and security. But if you’re aiming for long-term wealth creation, consider investing in the share market. While the stock market involves more risks, it offers the possibility of higher returns over time.

Risk Tolerance

Make a choice as per your risk appetite when selecting between equity and fixed deposit investments. If you seek steady and assured returns, investing in fixed deposits may be a good option. If you are willing to risk your money for the possibility of earning a higher return, you might think about investing in stocks or equity-oriented mutual funds.

Investment Horizon

Short-term investors should consider fixed deposit options due to the potential for negative returns from stock market volatility. You should prefer stocks for long-term gains because they tend to recover from fluctuations and yield good returns over time.

Conclusion

Ultimately, both fixed deposits and the stock market have their advantages and disadvantages. The best choice for you will depend on your financial goals and how much risk you’re willing to take. It may be worth considering a balanced approach that includes both FDs and the stock market. This way, you can benefit from the stability of fixed deposits and the potential for growth in the share market, creating a diversified investment strategy.

Frequently Asked Questions

Should I invest in FDs or the stock market for long-term goals?

Fixed deposits are usually ideal for short or medium-term goals. Their returns might fail to keep up with the rate of inflation over time. But stock market returns are known to get better with time. Therefore, invest in the share market if you have long-term goals.

Are fixed deposit investments completely devoid of risks?

FDs come with stable and guaranteed returns. Market volatility won’t affect how much you are gaining from a fixed deposit investment. But these instruments are not completely risk-free. Inflation might reduce the purchasing power of your gains with time.

Will the stock market offer better returns than fixed deposits?

The share market is known for offering great returns in the long run based on its historical performance. But this type of investment is also associated with high volatility and risks. So, you will have to assess your risk appetite before choosing the stock market over fixed deposits.

Are fixed deposits good for diversification?

If diversification is your aim, the stock market can help you more. But you can also invest in FDs with different textures and liquidity to diversify your portfolio.

Is investing in the stock market right for beginners?

If you are just starting out with investments, you can still consider the stock market. But these investments require extensive research and professional guidance. Therefore, it might be better to start out with more stable assets before investing in the volatile share market.