Market-linked investments v/s fixed deposits: Where should you invest?

Investors frequently face this question, regardless of where they are in their investment journey. The right answer to this question fuels the investment industry's quest for innovation. Today, there are several choices available in the market, catering to every investor's risk appetite, investment goals, liquidity needs and other investment needs.

There is no one-size-fits-all approach to answer the above question, but it is important to understand which financial instrument works best for you.

Fixed deposits and market-linked instruments are some of the most common investment options. An FD is a simple and stable fixed income instrument that lets you grow your initial investment amount for a fixed period of time at an agreed upon interest rate. Interest rates are unaffected by market conditions and so, both your principal and interest amount are guaranteed.

Market-linked investments, on the other hand, are highly volatile financial instruments that fluctuate based on market conditions. The returns on these types of instruments are generally higher when held for long periods but not guaranteed.

What are Fixed Deposits?
The assurance of consistent returns, stability, and the convenience of regular payouts make fixed deposits a preferred investment instrument in India and are issued by banks, post offices and NBFCs. By investing in a fixed deposit (FD), you can grow your savings over a fixed period of time at a fixed interest rate. With no effect of market fluctuations, FD is one of the safest investment options that offers assured returns.

Fixed deposits are also ideal investment options if you have short-term financial goals, you can protect your capital while also generating stable returns on your principal amount. You can also choose your preferred payout frequency depending on your financial requirements. Moreover, you can also get loans against your fixed deposits, to cater to any financial emergencies.

With the markets showing high levels of volatility, the need to diversify investment risks becomes more important than ever. At a time like this, fixed deposits become attractive modes of investment whether you're looking to park your funds safely or looking to gain assured returns.

What are Market-linked Instruments?

Market-linked instruments are investment options that are linked to the market, and hence carry a higher degree of risk. These investment options include NPS (National Pension System), ULIP (Unit Linked Insurance Plan), debt securities, indexes, mutual funds and equity shares.

Although these types of investments yield better returns, it's important to note that they are highly fluctuating and need to be held long-term to combat volatility. Given that these types of investments are highly risky, one must exercise due diligence to avoid taking risks.

Market-linked instruments are a great investment option if your risk-tolerance is fairly high, and are planning on staying invested in the market for a long time.

FD vs Market-linked Instruments: A Comparison

Different investors have different risk-appetites, financial goals, time horizons and need for liquidity. This is why it's important to build your investment portfolio based on your unique needs and requirements.

Here's a comparison between fixed deposits and market-linked instruments:

If you're risk averse and are looking to protect your wealth, you might be better off investing your money in fixed deposits that offer stable returns and enable you to choose your tenor and payout frequency.

However, if you're someone that has a high tolerance for risk and doesn't have immediate need for your investment amount, then market-linked funds may be a better choice for you.