loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

Choosing between stock market and fixed deposit investments

21 Jun 2022 0 COMMENT

Introduction

To lead a life free of financial worries, you need to make right investments that may help you fulfil all your financial goals. From your investment objectives to risk appetite and return expectations, many aspects influence the decision to choose an investment instrument. 

People often find themselves in the conundrum of choosing between a fixed deposit and investing in shares in the stock market. First, you need to note that these two investment instruments are radically different. While one is an equity investment involving considerable risk, the other is a fixed income instrument with lower risk and assured return.

Additional read: Equity Trading: Here’s everything you must know

The choice between fixed deposit and share market investment depends on your expectations from your investments. Before you take a call to pick the right investment instrument for you, understand the difference between the two:

Particulars

Shares

Fixed deposits

Meaning

Shares are ownership in a company. When you invest in them, you get ownership of the company to the extent of your share purchase

Fixed deposits are instruments wherein the bank offers a fixed rate of return for the sum you lend to them for a fixed period

Returns

Returns from equities are not guaranteed. They fluctuate depending on the market condition

Fixed deposits provide an assured interest on your money

Risk

Shares are considered risky investments because they are prone to market volatility

Fixed deposits are considered low-risk investments because these provide an assured return

Profit potential

The potential to earn profit from stock market investments is high

Profit is limited to the interest that you earn on your deposit

Liquidity

You can sell your shares any time. There is no lock-in period

Fixed deposits need to be held until maturity, ranging from a few days to 10 years. However, most of the fixed deposits can be redeemed before maturity with a nominal reduction in the interest rate

Effect of inflation

Historically, stock market investments have provided inflation-beating returns when held for the long term

Fixed deposits provide assured returns, but the interest usually is not enough to beat inflation in the long run

Clearly, there are marked differences between the two products. While equities are high-risk instruments that have the potential to give high returns in the long term, fixed deposits are low-risk investments that provide assured returns.

Additional read: Types Of Stock Trading In The Market

Should you invest in the stock market or fixed deposits?

Deciding whether you want to invest in shares in the stock market or fixed deposits should involve the following considerations: 

1. Investment objective

Start by evaluating your investment objective. If you have a financial goal in the near term, then the stability and security of fixed deposits will help. However, if your goal is to generate wealth in the long term, save for retirement that is 10-20 years away, or build a trust fund for your child, you could consider putting that money in the share market because it will give you higher income returns.

2. Risk appetite

When choosing between equity and fixed deposit investments, you must do an honest analysis of your risk appetite. If you are a low-risk person who wants stable and assured returns, you could consider investing in fixed deposits. If you have a higher risk appetite and are willing to stake some money for the possibility of higher returns, then you could put your money in shares or equity oriented mutual funds.

3. Investment horizon

It may be better to park your money in fixed deposits for short-term investments. Extreme volatility in the stock market may give negative returns in the short term. If you have a long-term investment horizon, shares can help you make better returns. This is because, despite volatility, the stock market usually evens out in the long run.

In summary

The decision to put your money in the stock market or fixed deposits entirely depends on your financial goals, risk appetite, and investment horizon. As a rule of thumb, it would be ideal if you could diversify your money between both instruments to get the best of both worlds for the short term and the long term.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Composite Corporate Agent License No.CA0113, AMFI Regn. No.: ARN-0845. We are distributors of Insurance and Mutual funds, Corporate Fixed Deposits, NCDs, PMS and AIF products. Please note that Mutual Fund Investments are subject to market risks, read the scheme related documents carefully before investing for full understanding and detail. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

The non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning etc. are not exchange traded products / services and ICICI Securities Ltd. is merely acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.