Should you invest in the Stock Market or Fixed Deposits?
Stock market and fixed deposits
The question should not be if you should invest in stocks or fixed deposits. It should rather be how much should you invest in stocks and how much you should invest in fixed deposits. Both investment instruments are extremely important but at the same time are extremely different from each other. They serve different purposes. One should not be completely ignored against the other. However, I would definitely help you to understand what should be the right balance between the two.
Let’s first individually understand the investor profile for both the options.
Stock market investments allow you to invest in shares of different kinds of companies in the market. There are many categories available in shares. Here are a few :-
- Categories based on the market value of the company: large cap, mid cap and small cap stocks
- Companies based on their sectors: bank stocks, pharmaceutical stocks, IT stocks, oil and gas stocks and more
Market linked investments like shares do not give you guaranteed returns. They are linked to the performance of the company. If the company does better, if there are no negative developments, if the growth trajectory is strong, then this growth of the company translates into the increase in stock price.
But stocks are extremely volatile. If it can give you more than 15% returns, it can also go negative. Risk and returns are always directly proportional to each other. If risk is high, returns will also be high. Every good thing comes at a price and high returns comes at the price of the risk you take. In the long term, stocks give healthy returns but it does not mean you can pick any stock blindly and invest with the expectation of returns in the short term.
Things you need to keep in mind before investing in stocks:
- Risk: Stock market investments are riskier than others. Even within the share market, the risk profile is different. There are some companies that are more risky like small-cap and mid-cap stocks are riskier because they are smaller in scale. Their growth trajectory is not as strong and promising as large cap stocks. Large cap stocks are comparatively less risky because they are bigger in ize, they have been in the market for long, they have proven their mettle in times of crisis.
- Research: To understand the risk levels, you need to conduct research for the stock markets. There are thousands of listed companies but thanks to stock indices they are grouped under various categories so it will be easy for you to pick one.
- Surplus funds: Your investment in the stock market should be the surplus funds you have at hand. You should have enough funds in emergency or liquid funds that can be accessible in times of need.
- Power compounding: The reason to keep surplus funds in the markets is because you only get better returns if you invest in stocks for a long time and not disturb your investments in the short term. Equities are a good long term investment. For your investment to realise healthy returns, they need to be undisturbed for a long time
Fixed deposits are simple and easy products and are provided by banks. FDs are available for said tenures: 6-month FDs, 1-year FDs, 5-year FDs and so on and so forth. For the said tenure, you get a fixed rate of return. They give guaranteed returns. Some of the best fd interest rates are 5% and above.
Stocks vs Fixed Deposit
Like mentioned before, it should not be a matter of stocks vs fixed deposit rather how much in stocks and how much in FDs. FDs give you guaranteed returns but moderate but stocks give higher returns but not guaranteed. Here’s how you can deal with your investments:
If you think you can take more risks, you should put more money in stock markets and lesser in FDs. If you think you do want to take a lot of risk and play it safe with your investments, then you can keep investing in fixed deposits more than you invest in stocks.
Why both and why not just one
Scenario 1: Say you are risk loving and technically you are more suited towards equities, you put all your money in the markets. If the markets fall, you will lose all your money. In case of emergency, if you redeem your investment, you will actually end up earning losses. If you had put at least some money in FD, during emergencies, you could have tapped on to the FD and let your stock investments be.
FD interest rates are guaranteed. This is certain that at least you will get some money out of your investment in FDs. You will never be at a loss.
Scenario 2: If looking at guaranteed returns, you invest in fixed deposits and put all your money here, you will again be at a loss. Stocks have the ability to beat inflation. FDs cannot do that. You will lose out on extra money that you could have earned through stocks. Also, if FD returns are constant and inflation is on the higher side, whatever minimal money you get might actually be lesser in value.
In conclusion, decide the asset allocation in both investment options based on your risk appetite, liquidity needs and future goals. You can also keep rebalancing your investment portfolio as you age or reach closer to your goals.