The struggle to strike the optimal balance between risk-taking and capital growth is real and evolves in new shapes and forms as markets move. While stocks can offer high capital appreciation, they come with their share of risk. The good old FDs, on the other hand, come with low risk but are not considered to be a good fit for capital growth. They can, at best, offer capital preservation at 5 to 7%, struggling to beat inflation after tax deduction. But what if we told you that there are FDs that can beat inflation and not just that, they can help with capital growth? Small finance banks and NBFCs offer FDs that can fetch you returns up to 9.1%.
But is it really that simple? Or are there other factors involved? How risky is it to deal with smaller banks and NBFCs? Let’s dig deep to answer some of these questions in this article.
What are Fixed Deposits? How do They Work?
Fixed deposits are a type of investment where you deposit a lump sum amount for a fixed period at a predetermined interest rate. At the end of the tenure, you receive your principal amount plus the interest earned. FDs are considered safe investments because they offer guaranteed returns, unlike market-linked investments, where returns can fluctuate.
Why do Investors like FDs?
FDs have been a staple in investor portfolios due to several reasons.
- Fixed Tenure: FDs have flexible tenures ranging from a few days to several years, and you can choose the best fit depending on your financial goals and liquidity needs.
- Interest Rates: The interest rate is fixed at the time you open the FD, and it depends on the tenure. Generally, longer tenures offer higher interest rates.
- Compounding: Institutions providing FDs compound your interest either quarterly, annually, or monthly, depending on their policies.
- Withdrawal Rules: You can withdraw funds prematurely, but this flexibility can cost you. But some small banks or NBFCs might not levy any such charges after a period, so try to check with your provider.
- Safety: The Deposit Insurance and Credit Guarantee Corporation (DICGC) covers deposits in small finance banks for up to ₹5 lakh (both principal and interest), providing investors a safety net in case the bank fails. DICGC insurance is automatic and does not require separate registration, reassuring investors choosing FDs from small banks.
Comparing Returns: Regular FDs vs Small Bank & NBFC FDs
NBFCs and small finance banks offer significantly higher interest rates on fixed deposits (FDs) compared to large commercial banks, making them attractive options for investors seeking better returns.
As of 2024, NBFCs like Bajaj Finance and Shriram Finance provided FD interest rates ranging between 8.5% and 9.5%, while small finance banks such as Jana Small Finance Bank and Ujjivan Small Finance Bank offered 7.75% to 8.5%. In contrast, leading commercial banks such as SBI, HDFC Bank, and ICICI Bank typically offered only 6.5% to 7.5%. Senior citizens enjoy an additional 0.5% to 1% boost, pushing rates up to 10% in some NBFCs. This translates to equity-comparable capital growth even after deducting taxes.
Additionally, NBFC and small bank FDs often offer flexible tenure options and higher payout frequency choices, making them appealing to investors with different investment goals. While deposits in scheduled banks (including small finance banks) are insured up to ₹5 lakh under DICGC (Deposit Insurance and Credit Guarantee Corporation), NBFCs do not have this coverage. Top-rated NBFCs, however, mitigate risks by maintaining strong credit ratings (such as CRISIL AAA or ICRA AA+), ensuring credibility.
Even though all FDs, including those from NBFCs and small banks, attract TDS, investors can claim deductions up to ₹1.5 lakh under Section 80C by opting for a 5-year tax-saving FD, available only with commercial and small finance banks.
If you prioritize liquidity, returns, and flexible payout options, you may find NBFC and small bank FDs more rewarding than traditional bank deposits.
Some examples of high-yield FDs from small banks and NBFCs are:
- Jana Small Finance Bank with up to 8.60% per annum
- Unity Small Finance Bank with up to 9% for general customers, 9.5% for senior citizens
- Shriram Finance (NBFC) with 7.85% to 8.80% for tenures ranging from 12 to 60 months
Strategies to Help You Maximize FD Returns Amid Inflation
To ensure the best possible returns from FDs, consider the following strategies:
- Opt for small finance banks and NBFCs, as their higher interest rates make them more inflation-resistant than traditional bank FDs.
- Choose long-term FDs with higher rates, as longer tenures often come with better rates, helping maximize your actual returns.
- Diversify across institutions. Splitting deposits among multiple banks/NBFCs can help reduce your risk exposure.
- Leverage cumulative FDs. Compounding helps accelerate your returns, making a significant difference over time.
- Consider tax-saving FDs. If taxation is a concern, you can invest in, say, a 5-year tax-saving FD to reduce your taxable income under Section 80C.
Factors to Consider Before Choosing an FD
The following factors help you determine whether an FD meets your needs:
- Interest Rates: Compare rates across multiple small finance banks and NBFCs
- Deposit Safety: Check if the institution is covered under DICGC insurance (for smaller banks) or has a strong credit rating (for NBFCs)
- Liquidity Needs: Avoid locking funds for too long if liquidity is a concern, but keep in mind that longer tenures help in beating inflation better
- Tax Efficiency: Plan your FD investments based on tax implications and consider tax-saving options if necessary
- The Institution’s Reputation: Prioritize better-rated institutions with stronger financial stability out of the options you have
Conclusion
FDs have evolved with the market, and the new and improved ones are finding a spot for themselves in savvy investors’ portfolios with each passing day. Are your strategies evolving with the times?
FAQs related to FD rates and Inflation
Can FD returns outpace inflation in the long run?
In the long run, FD returns rarely outpace inflation, especially with traditional bank rates. However, small finance banks and NBFCs offer higher rates, improving the chances of real returns. Inflation keeps fluctuating, but your purchasing power declines if FD rates consistently lag behind it. To stay ahead, invest in high-interest FDs, reinvest strategically, and complement FDs with inflation-hedging assets like equities or inflation-linked bonds.
What is the current FD interest rate vs. inflation rate?
As of 2025, India’s retail inflation rate is around 3.61%. Traditional banks offer FD rates between 5-7%, while small finance banks and NBFCs provide 7-9.5%. The real return depends on taxation and compounding. Currently, high-yield FDs can outpace inflation, but long-term sustainability depends on economic conditions. Always compare rates across institutions to ensure inflation-adjusted growth in your savings.
Are FDs a good investment during high inflation periods?
FDs struggle during high inflation if returns don’t exceed inflation rates. Traditional bank FDs often fail, but small finance banks and NBFCs offer better chances with higher rates. However, taxation reduces real returns. During inflationary periods, diversify investments—consider inflation-resistant assets like stocks, gold, or inflation-linked bonds alongside FDs. Choose high-yield FDs to maximize real returns while ensuring liquidity and safety.
What are the risks of investing in FDs during inflation?
The biggest risk is negative real returns—if inflation outpaces FD interest rates, your savings lose value. Taxation further reduces net earnings. Long-term FDs also expose you to reinvestment risks if future rates are lower. Additionally, NBFC FDs lack DICGC insurance, making credit rating crucial. To minimize risk, invest in high-interest FDs, ladder your deposits, and diversify into inflation-hedging assets.
How can I make my FD returns inflation-proof?
Invest in small finance banks or NBFC FDs with the highest rates to protect FD returns from inflation. Choose cumulative FDs to maximize compounding benefits. Diversify into inflation-resistant assets like equities or gold. Consider laddering FDs to manage reinvestment risks. Utilize tax-saving FDs or opt for tax-free bonds to enhance post-tax returns. Regularly monitor inflation trends and adjust investments accordingly.
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