Fixed Deposits (FDs) have traditionally been a cornerstone of conservative investment among Indians. They are preferred for the sense of safety and guaranteed returns. But one must ask if they are still the best bet, especially given the current economic climate.

Vishwanathan Iyer, senior associate professor–finance & accreditation at Great Lakes Institute of Management, Chennai, says, “The FDs have been a traditional go-to investment instrument for Indian households due to their simplicity, guaranteed returns, and the feature of capital protection. However, given a series of rate hikes by the RBI after 2022, FD interest rates have peaked at about 7-8%. With inflation stabilising and global central banks pivoting, FD rates are only likely to plateau or fall in the coming quarters.”

For a 30% tax bracket individual, this works out to sub-5% after tax returns and perhaps, even negative real returns.

Jagriti Arora, assistant professor–finance & accounting at Great Lakes Institute of Management, Gurgaon, notes that the RBI has been cutting the repo rate in 2025 to stimulate economic growth. Currently, the repo rate stands at 5.5% following multiple cuts this year. The repo rate directly impacts FD interest rates, leading banks to offer lower returns.

“For instance, in response, SBI cut its FD rates by 15 basis points for general and senior citizens on tenures between 46 days and less than one year, effective July 15, 2025. This means that ‘guaranteed returns’ from FDs are lower, which further eats into the ‘real returns’. If the FD interest rate is close to or even below the inflation rate, your purchasing power might not increase or could even decrease over time. For example, if your FD gives you 6.5% and inflation is 5%, your real return is only 1.5%,” Arora explains.

What should you do

The answer lies in choosing asset classes that offer a better potential for wealth creation. First, equity markets have outperformed FDs for a long time, giving inflation-beating returns.

Although these come with higher risk, choosing an equity mutual fund can help mitigate some of these risks. Second, debt mutual funds, corporate bonds, and RBI floating rate bonds are also emerging as attractive alternatives, offering potential for better tax efficiency (for debt mutual funds held for over three years) and potentially higher yields than traditional bank FDs.

Finally, Exchange Traded Funds (ETFs) are also a good investment plan for retail investors. These bring with them the advantages of diversification, cost efficiency (low expense ratio), transparency, and tax efficiency.

Younger investors, especially millennials and Gen Z, are no longer relying solely on FDs. “Tech-enabled platforms have made it easier to explore better-yielding, relatively low-risk options like Target Maturity Debt Funds (6.5–7.2%) with indexation benefits after 3 years, RBI Floating Rate Bonds, currently offering 7.72%, and debt mutual funds and hybrid funds, offering more tax efficiency and flexibility,” says Iyer.

These instruments offer better post-tax returns, without drastically increasing risk, provided investors understand their liquidity and time horizons.

While FDs may no longer be the best bet, they aren’t obsolete either. They should now play a supporting role within the ‘fixed-income’ portfolio. The shift should be from “safety-first” to “safety with strategy.”

One should diversify into debt funds, gold bonds, and hybrid instruments, which help beat inflation, improve post-tax returns, and balance risk without venturing into volatile assets.

“It is, however, important to note that FDs still make sense for senior citizens valuing fixed income and capital safety, or those in the lower tax brackets, or investors needing a safe parking space for short-term goals. In a world of rising financial literacy and fast-changing interest rate dynamics, clinging to FDs alone is no longer prudent,” says Iyer.

Arora adds, “Ultimately, the smartest move in 2025 is not to abandon FDs entirely, but to position them as a component of a well-rounded portfolio for liquidity, capital preservation, and wealth creation.”