Are you exploring options to get the best returns on investment? Well, if you are patient enough and want a secured investment option, Fixed Deposit (FD) is an attractive option. On the other hand, if you aim to own an asset that also offers price appreciation as the time passes, investment in the real estate sector should be considered. 99acres brings to you a comparative analysis of investment in real estate vs fixed deposits.

Here is a comparative analysis of investment in real estate vs fixed deposits.

Fixed Deposits

Fixed deposits are financial instruments that generally offer a higher rate of interest than a regular savings account. In an FD, money is locked-in for a fixed timeframe, and a fixed rate of interest is given on the sum invested. Banks offer a high rate of interest because of the low liquidity and lock-in period involved in an FD.

However, a comparatively newer instrument called Flexi-FD allows people to go for the interest rate of an FD and liquidity of a savings account.

The general rate of interest on an FD in India is in the range of 4 to 7 percent in public sector banks. Some private sector and foreign banks give a higher interest rate of up to eight percent per annum. The duration of an FD varies anywhere from seven days to 10 years.

A regular interest flow from an FD is better than an investment in equity and a mutual fund for many as it assures a regular and fixed rate of interest. However, the interest received from FDs is taxable under the law.

Taxability of FDs

If the interest paid to a customer in a financial year exceeds Rs 10,000, the bank levies a tax of 10 percent on the interest amount. It is known as Tax Deducted at Source (TDS). However, the tax is actually applied according to the income tax slab of the FD holder.

Though FDs provide a stable interest rate on the sum deposited with the bank, it depends on the risk appetite and the financial goals of a person. Let us have a look at the potential of investment and returns from the real estate sector.

Real estate as an investment option

Real estate investment in India remains a compelling choice, supported by the sector's resilience and potential for long-term growth. Despite the COVID-related market fluctuations, the industry is showing signs of recovery. It is driven by factors like urbanisation, rising disposable incomes, and a growing middle-class population.

Government initiatives, including regulatory reforms like Real Estate Regulatory Authority (RERA), have enhanced transparency and stability in the market. The recent uptick in residential property prices in key cities signals a renewed demand and confidence in the sector.

Real estate offers the dual benefits of potential capital appreciation and steady rental income, making it an appealing option for long-term wealth creation. The diversification benefits it adds to an investment portfolio help balance overall risk. With India's ongoing urban development and growing economy, the long-term outlook for real estate investment remains positive.

If you intend to invest in the real estate sector, the points to remember are -

• A relatively larger sum of money is required to buy a property or a piece of land than an FD investment
• Besides the cost of the land or apartment, expenses like stamp duty, registration charges and maintenance charges exacerbate the total cost
• The appreciation in the prices may not be on the expected lines, especially in times of a general slowdown in the economy
• You must get the property evaluated in accordance with the market rates before making the investment
• Other factors like locality, connectivity, and infrastructure, among others, also play a decisive role in the price appreciation of the property.
• A commercial or rental investment can generate income for you
• Sometimes, the rental income generated is a mere 2-3 percent
• You cannot sell off a property quickly as it involves huge corpus of money

Choosing between real estate and fixed deposit

Let us understand with an example. To buy a land/apartment worth Rs 1 crore, you must scoop out an EMI of Rs 1 lakh a month for the next ten years. For that, you must earn Rs 2-3 lakh per month. This amounts to a significant financial planning and high earning potential.

However, in the case of opening an FD, you do not need a huge chunk of money. It can be done with an amount as low as Rs 20,000. Moreover, FDs come with a stable rate of return.

Sharing her views on the investment potential of both the investment instruments, Indu Tanwar, Senior Manager, Andhra Bank, says, “Traditionally, people with less risk potential tended to choose FDs over everything else. With the introduction of ‘Flexi FDs’, people reap the benefits of both FDs and savings account at the same time. On the other hand, due to dismal real estate market conditions, people hesitate to invest in real estate after a certain limit. Slow growth and presence of many fringe factors push people away from the property sector. FDs, however, provide a steady interest in income and suits almost every income group.”

Importance of understanding liquidity and investment time horizon

When considering investments in real estate versus fixed deposits (FDs), understanding the concepts of liquidity and investment time horizon is crucial. These factors play a significant role in determining the suitability of an investment choice based on an individual’s financial goals and needs.

Liquidity considerations

Real estate: Real estate investments are generally less liquid compared to other asset classes. Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its market price. Selling property can be a time-consuming process, often taking several months or even years, depending on market conditions. This lack of immediate liquidity makes real estate a less ideal option for investors who may need quick access to their funds.

Fixed deposits: FDs, on the other hand, offer higher liquidity. Although they are time-bound, most banks and financial institutions allow for premature withdrawal of fixed deposits, albeit with some penalty. This feature makes FDs more suitable for investors who might require funds on short notice or prefer the flexibility of accessing their money without significant delays.

Investment time horizon

The investment time horizon refers to the amount of time an investor expects to hold an investment before needing access to the capital.

Short-term horizon: For investors with a short-term horizon (a few months to a few years), FDs are more appropriate. They provide the security of capital and fixed returns over a predetermined period without the complexities and uncertainties of real estate transactions.

Long-term horizon: Real estate investments are typically more aligned with long-term financial goals. Over extended periods, real estate can offer substantial returns through property value appreciation and rental income. It’s suitable for investors who are not reliant on immediate liquidity and can afford to wait for the right market conditions to sell or lease their property.

In a nutshell, choosing between the two instruments can be a bit tricky. If the investment, as well as the risk potential, is high, the investor can go for real estate investment. But, if low yet steady interest is desired, FDs are a better option.

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