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Choosing between stock market and fixed deposit investments

9 Mins 21 Jun 2022 0 COMMENT 39 LIKES

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.

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