When individual investors consider different options to start investing, fixed income deposits and private equity may leave them at crossroads. These two investment options are explained here to ease the investment decision.
What are Fixed Deposits?
Fixed-income deposits, or fixed deposits, or term deposits, are the investment avenues where an individual invests a sum of money with a bank, post office, or NBFCs (Non-banking Financial Companies) for a fixed term (maturity) and earns regular interest at a fixed rate until maturity. Fixed deposits (FD) offer guaranteed returns along with complete capital protection. The principal amount is paid back to the depositor on the completion of the specified tenor.
Features and advantages of investing in FDs
An investor can consider the following features and advantages of investing in FDs:
- FDs are latent to market volatility and amongst the safest investment avenues that provide you with guaranteed returns.
- An FD offers higher interest rates when compared to a savings account interest rates
- An investor has the option to receive accumulated interest or regular interest payouts periodically. Depending on the financial needs, an investor can choose from monthly, quarterly, half-yearly, or yearly interest payouts.
- Flexibility is also a primary advantage of FDs in terms of investment amount and tenor. Different financial institutions offer deposits with different tenors. The tenor generally ranges from seven days to ten years. The investment amount starts with as low as Rs. 1000, and the upper limit can go as high as five crores,.. depending on the issuer.
Using an online FD calculator offered by the FD issuer, you can calculate your returns before investing your funds. It helps you to plan your FD investment better.
What is Private Equity?
Private equity is a form of private financing comprising funds and investors directly investing in companies. It is an alternative investment class and represents the unlisted capital on a public exchange. Investors need to hold the investment for an extended period to reap benefits – Generally ranging from 5 -10 years of investment.
Retail and institutional investors can provide capital to a private equity firm that is utilized to invest in technology, expand working capital, make acquisitions, and strengthen the balance sheet. Primarily investors are the large institutional investors and high net worth individuals as they can allocate a substantial investment for a longer period. The investment horizon can be as long as ten years. Venture capital, Seed capital, Leveraged buyouts, Distressed funding, and Growth capital are the subset of private equity.
For example, a private equity firm is looking for strong companies with established growth as well as new companies with strong fundamentals to grow. The private equity firm will review numerous business companies with great growth potential and decide to invest in a tech company.
Features and advantages of investing in private equity
Following are the benefits of private equity investing:
- Stringent selection process
A stringent selection process is performed before investing in the target company Firms that manage private equity assess and select a company after thorough research based on a significant amount of resources. The investors are very particular about investing and taking care of the risk factor involved. They go for potential companies for growth after massive filtration based on all the crucial characteristics. These experts make efforts to minimize the investment risk.
- Higher Returns
Private equity firms have proficiency at creating value. Investors in private equity can gain from carefully selected companies with strong corporate governance and growth potential. Historically, Portfolios with an allocation to private equity have provided higher returns. Data shows that private equity investors have remained bullish in India, with a 120% increase over the first half of 2020 (excluding Jio).
Differentiation – Fixed Deposits vs Private Equity
With the above explanation, you can have a clear understanding that the two investments are entirely different in two different investing spaces. Here are quick differentiating factors:
- Market Influences
Your funds in fixed deposits remain unaffected from market influences, like recession, inflation, government borrowing, etc. You will receive your fixed returns. In contrast, Private Equity is a higher risk asset class. It is affected by numerous factors, including regulatory hurdles, the competitiveness of the market, growth potential, and positioning of a company.
FDs can prove to be a great help to deal with an emergency. If you ever need money in a financial emergency you can withdraw your deposit prematurely. On the other hand, private equity investors need to give notice before exiting a fund, even when a huge loss occurs.
You can invest in an FD for a short term period or long term period as per your financial goals. In the case of private equity, you have to invest your funds for the long term.
- Risk Factor
Private equity investing carries a moderate to higher risk level as the percentage of successful portfolios is considerable. On the other hand, fixed deposits are considered a low-risk investment. Once you have invested funds, you will see them grow over time.
- Ease of Investing
Fixed deposit is a straightforward investment – easy to invest and easy to withdraw. Every investor receives the fixed interest as per specified terms under the governance framework. On the other hand, private equity investing comes with the following challenges:
– It may be challenging to liquidate holdings in private equity. There is no ready-made order book like public markets to match orders from buyers and sellers.
– Another challenge is related to pricing. There are no market forces to determine the cost of shares for a company funded by private equity. The price is determined through negotiations between buyers and sellers.
– The rights of private equity shareholders are also one of the challenges. Negotiations dictate rights. There is no governance framework. Rights are generally decided on a case-by-case basis after considering individual circumstances. There is a high probability of disparity.
Thus, an investor with a moderate risk profile and long-term horizon can prefer the route of private equity investing. In contrast, investors with a low-risk profile can invest in fixed deposits to short-term or long-term financial goals. You can seek assistance for Portfolio Allocation services from Investment Management company like RURASH Financials, to include the best investment options in your portfolio.
Rurash Financials- An aggregator for Fixed Income Products
RURASH is one of the few investment management firms that understand that senior citizens need to put their investments in safer investment products to generate an alternate source of income for their golden age, thus offering them the best possible fixed-income investment instruments which not only beat the inflation but also generate consistently higher returns.