Fixed Deposit (FD) vs. Real Estate – Which One is For You?

Fixed Deposits (FDs) are the basic safety net for millions of Indians over the years. They are regarded as safe and secure options that are immune from market fluctuations. However, what about their viability in comparison to real estate? Here’s looking closely at the picture.

Experts usually recommend a balanced financial and investment portfolio for all individuals with varying degrees of risk. The first layer is of course life and health insurance along with fixed-income investments like FDs, PPF and others. Then there comes gold, real estate and mutual funds/stocks which have higher risk levels. In this context, how does the fixed deposit (FD) stack up against real estate?

Biggest Benefits of Fixed Deposits

1. Fixed and Guaranteed Returns– FDs have guaranteed returns for investors, offering them fixed interest rates for the entire duration of the investment. You do not have to worry about any market fluctuations or volatility. Your investment will be safe and secure for the long haul.
2. Building up future savings– FDs help you invest securely for meeting future goals. Investments made now will help you amass a lump sum corpus in the future which can help you with major life goals such as building or buying a house, buying a car, taking a foreign vacation, meeting the costs of higher education for children, and so on.
3. Flexible investment nature– You do not always have to invest a huge sum of money in a fixed deposit. You can start investing Rs. 20-30,000 in an FD and let it mature over time. You can also put in a few lakhs or more. It all depends on how much you can spare for the long haul. However, there is no compulsion that you have to invest a lump sum amount.
4. Tax saving opportunities– While the interest earned on fixed deposits is always taxable and banks will deduct TDS on the same, you can still save some taxes under Section 80C. This is possible through investing in tax-saver FDs with 5-year lock-in periods. These FDs can get you tax deductions under this section.
5. Income generation options– FDs also offer steady opportunities to generate income via the interest that you earn on your deposit. You can choose to receive interest payouts on a monthly, quarterly or bi-annual basis. You can also choose annual payouts with some lenders. This gives you a steady monthly return, especially if you have already put in a large sum of money. You can also choose to compound the returns, thereby earning interest upon interest and building up a sizable corpus for the future. The options are quite flexible with a fixed deposit.
6. Easy procedure for opening a fixed deposit account– Nowadays, fixed deposit accounts can even be opened online if you have the funds ready. You only have to check and compare rates of interest offered by different banks before you opt to open a fixed deposit account with a particular lender. It is a simple and easy procedure and does not require as much homework or due diligence.
7. Loan facilities– You can get loans against your fixed deposits in several cases. You can use the FD as an asset for raising capital to meet business needs or tide over any other urgent scenario.
8. FDs do not have additional costs– Unlike real estate investments, FDs do not have any extra costs. You do not have to pay any extra charges.

Highest Fixed Deposit Rates at Major Lenders

Here’s taking a look at the approximate rates of interest (subject to change) at leading financial institutions in the country in order to give you an idea:

The best interest rates on tax-saver FDs are between 5.50-6% on average.

You can use this simple FD Calculator online to calculate returns on your fixed deposit investments.

Benefits of Investing in Real Estate

1. Tangible Asset– With a real estate investment, you are building a tangible asset for the future. It is a physical and solid asset that will secure your family’s financial future.
2. Scope of High Returns– Real estate, while not offering guaranteed returns, does have scope for offering unprecedented returns. Investing in a property for the long term may give you high benefits in terms of capital value appreciation. Properties in strategic locations have been known to ensure 2X or 3X returns at times as well. Holding onto a property for 10-15 years will help you gain from excellent appreciation and returns on your investment.
3. Income Earning Options– Real estate investments help investors create a second line of income through monthly rentals. You can rent your property out to earn steady income every month. This will help you break even on your investment over a period of time and build a secure income channel for retirement and your family in the future. In fact, rental rates appreciate annually as well, giving you increased income which will help combat inflation.
4. Tax Benefits– Real estate investments give you sizable tax benefits. If you have taken a home loan to buy the property, then you will get deductions on both your principal and interest repayments. You can get up to Rs. 1.5 lakh and Rs. 2 lakh annually as deductions under Section 80C and 24 for principal and interest repayment respectively. There are tax deductions available for first-time home buyers as well. Affordable home buyers also get the advantages of PMAY interest subsidies along with other benefits.

Things to Note While Investing in Real Estate

1. Real estate requires a sizable capital outlay. You have to invest a lump sum amount for buying any property. Even the down payment is considerable especially in major Indian cities.
2. There are added costs for buyers. These include registration charges, stamp duty and other additional costs like floor rise charges, garage costs, society fees and so on. These add up to the initial property cost.
3. Lack of liquidity is a factor. While you can break your FD by paying a penalty or losing out on interest, you cannot sell off real estate just like that. It requires a lot of time and energy.
4. Property maintenance and renovation necessitates periodic expenditure, time and involvement on your part.

Real Estate is The Hottest Proposition Right Now

Yet, things are clearly rebounding positively in the Indian real estate market. Residential demand has bounced back, leading to property prices going up throughout India’s top-8 cities and that too between 3-7% in 2021. Reports indicate how more than 2 lakh units were sold last year with sales figures going up by 13% in these main cities as compared to 2020. ET Money experts have also highlighted how the average 10-year real estate investment return has stood at 10% overall. This takes into account the top 9 cities in the country. Going by this figure, it can be fair to say that real estate returns have comfortably stayed ahead of inflation. In some cases, the return has been even more, considering infrastructural and commercial development of various localities.

What is Your Take-Away?

If you are looking at comparing between fixed deposits and real estate, it is a no-brainer actually. If you can afford it, invest in real estate for the long term. Your investment value will greatly appreciate should you wish to sell it off in the long run and you can also earn steady monthly income from the asset in the meantime. You will also enjoy tax benefits that will lighten your load considerably. You can also build a tangible asset for the future while future-proofing the household from inflation in the coming years.

At the same time, do not completely neglect fixed deposits. Allocate a part of your portfolio towards such low-risk investments for meeting specific goals. Have a clear plan in mind about how much you are willing to spend in this regard. Yet, real estate is the bigger goal that will give your family financial and social security in a way that not many investments can.