Fixed deposits are not as popular among young investors these days, who tend to prefer other investment options like stocks, mutual funds, and commodities such as gold and silver. However, one generation above still favour FDs because they see them as a safer way to preserve their capital. They believe that equities are riskier, while FDs provide a sense of security.
Neither perspective is entirely right or wrong; it depends on the investor’s age and risk tolerance. It’s not a bad idea to opt for FDs as part of a diversified investment strategy and allocate some funds.
Investing in stocks requires a good understanding of economic factors, industry trends, and specific companies, along with their performance relative to their peers. Choosing the right company can lead to significant returns while picking the wrong stock can lead to capital erosion if not managed carefully.
In this article, we will compare the returns an investor would have received if they had invested Rs 1 lakh in both the shares of HDFC Bank and in HDFC Bank’s FD simultaneously five years ago.
Returns Comparison
HDFC Bank, being the biggest private bank in India and the third-largest company by market capitalisation of around Rs 11,70,646 crore after Reliance and TCS, currently shares trading at Rs 1542 per share on the BSE, nearly unchanged but down from the previous day’s closing price of Rs 1548 per share on the BSE.
Over the past year, the company’s shares have delivered a negative return of around 7%, while other banking stocks have delivered impressive returns, regardless of whether they belong to the government or private sector. Additionally, during the same period, the Sensex has delivered a return of 25%.
If you had invested Rs 1 lakh in HDFC Bank shares on the same day five years ago, you would have seen a return of around 37%, meaning the investment of Rs 1 lakh would now be Rs 1.37 lakh in five years.
On the other hand, Fixed Deposits or FDs serve as long-term investment tools that help investors save money over extended periods. Investors can choose a fixed tenure for the deposit to remain with the bank. Assuming the same amount of investment in the FD five years ago with monthly compounding, it would accumulate to Rs 1,41,498 at an annual interest rate of 7%, which is slightly higher than the returns generated by the shares of HDFC Bank during the same period. This is achieved without taking much risk, as equity is considered a risky asset with the potential of losing the invested capital.
Despite being the biggest name in the banking sector, HDFC Bank has yet to generate attractive returns for its shareholders, with the shares of the bank delivering a return of around 317% in the past decade. This return is obviously lower than other stocks, where some give multibagger returns within just one year.
FD is Best For these Investors:
Conservative Investors: Investors who are risk-averse and prioritize the preservation of their capital often prefer FDs due to the guaranteed returns and low risk of loss.
Ideal funds: FDs are suitable for individuals who have short-term savings goals and need a secure place to park their funds for a specific period, such as saving for a down payment on a house or a vacation.
Retirees: Retirees who rely on a fixed income stream for their living expenses often prefer FDs as they provide a steady source of interest income without the volatility associated with other investments like stocks.
Emergency Fund Builders: FDs serve as an ideal option for building an emergency fund as they offer liquidity and stability. Investors can access their funds quickly in case of unexpected expenses or emergencies.
Investors with Low-Risk Tolerance: Individuals with low-risk tolerance or those who cannot afford to take on significant investment risk may opt for FDs as a safe and reliable investment option.
Individuals Seeking Predictable Returns: Investors who prioritize predictable returns and prefer to know exactly how much they will earn on their investment may find FDs appealing, as the interest rates are fixed for the duration of the deposit.
Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
