Will stocks give better returns than FDs?

Not if you have a 1-2 year investing horizon. Given the prevailing uncertainty and high valuations of other assets, fixed deposits are a better option now.

Money Today        Print Edition: December 2010

The first lesson for any investor is that high risk can earn high returns. Stocks have the potential to give huge returns but also carry a big risk. Bonds are safe, but you get niggardly returns.

The second lesson in investing is that stocks give the best returns if held for the long term. If you have a short-term investing horizon, it's better stick to the safety of debt.

"If you are looking for an investment avenue that offers both safety and decent returns, there's nothing better than fixed deposits right now"
Bharat Bhushan
CEO, Money Options
However, in the current situation, it seems that even medium-term investors would do well to invest in fixed deposits. Equity markets are currently displaying mixed signals.

Some analysts say they are ripe for a correction and that the Nifty could go down to 5,200 levels before it resumes its long-term uptrend.

Others are confident that the Indian equity markets will move up now because several blue-chip shares have not participated in the current rally.

These include index heavyweights, such as Reliance Industries, L&T, Bhel, Bharti Airtel and ONGC. Experts believe that once these laggards start rising, the indices will shoot up.

Should you share their optimism? Can you take the risk? More importantly, is the reward big enough to justify the downside risk? If your answers to all three questions is an emphatic no, steer clear of equities. The global economy is facing another financial crisis.

BEST CORPORATE FIXED DEPOSIT RATES
CompanyOne Year Two YearsThree Years
Unitech
11.57
12.8614.36
Avon Corporation
11.4612.7314.19
JP Associates
11.0212.2413.66
Birla Power 10.7812.7314.19
Zenith Birla9.211.3612.63
Figures are percentage yield of the cumulative option
Domestic corporate earnings have been good but the growth is plateauing. Inflation has not abated and interest rates continue to be high.

Simply put, don't expect markets to go through an action replay of 2009 and 2010. The returns from now onwards can be in the region of 12-15%.

But as mentioned earlier, this comes with a downside risk of 12-15%.

On the other hand, fund-starved corporates are offering attractive interest rates on fixed deposits (see table).

The three-year yield is close to the returns expected from equity investments over the next 2-3 years. Sure, these deposits don't carry the highest AAA credit rating, but they are fairly safe.

Besides, they will not give you sleepless nights like equity investments. Remember, however, that income from fixed deposits does not enjoy long-term capital gains tax exemption as do investments in equity and equity-linked instruments. So, if you are in the highest income bracket, the yield may be lower.

Contrarian investing is the best strategy
1.Swim against the tide
2.Pick stocks that MFs are buying?
3.Are cheap stocks good investments?
4.Are stocks better than FDs?
5.Can you lose money in debt funds?
6.Is online trading cheaper?
7.Should you invest in equities?
8.How online plans benefit buyers
9.Should you let term plan lapse?
10.Is gold a good investment?
11.Is renting a house cost-effective?
12.Follow rules of investing?

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