FDs vs stocks vs mutual funds: Why retirees still choose stability over higher returns

Despite the growing popularity of market-linked instruments like mutual funds and stocks, fixed deposits (FDs) remain the go-to investment choice for many retirees and senior citizens. The reason? Stability, predictability, and peace of mind — even if it means sacrificing higher returns.

> Fixed Deposits: Capital Protection and Predictable Income

For retirees who rely heavily on passive income, the assurance of a fixed return outweighs the allure of market-linked gains. FDs offer guaranteed interest payouts, minimal risk of capital loss, and a clear maturity structure. While post-tax FD returns may fall short of inflation — especially for those in higher tax brackets — they still offer a critical advantage: financial certainty. This is crucial for retirees who cannot afford the volatility or drawdowns that equity markets may bring.

> Stocks: High Returns, But High Risk

In contrast, direct equity investment promises superior long-term returns but comes with considerable risk. For retirees, the potential of a sudden downturn can be financially devastating, especially when withdrawals need to be timed to fund ongoing living expenses. The sequence-of-returns risk — where early losses in retirement drastically impact a portfolio — is a real concern when relying on equity markets.

Moreover, selling stocks annually to generate income in a bear market can erode capital far quicker than anticipated. This uncertainty makes stocks less suitable for those prioritising capital preservation over growth.

> Mutual Funds: Balanced but Still Volatile

Mutual funds, particularly hybrid or conservative schemes, offer a middle ground. They diversify investments across debt and equity, offering potentially better returns than FDs with relatively lower volatility than direct stocks. However, they still carry market risk, and returns aren't guaranteed. For risk-averse retirees, even moderate volatility may cause stress and uncertainty, especially during prolonged market downturns.

Additionally, mutual funds require a basic understanding of market cycles, fund categories, and taxation — knowledge not all retirees are comfortable navigating without financial advice.

> Behavioural Finance: Why risk isn’t worth it for retirees

Retirees often exhibit stronger loss aversion, where the fear of losing money outweighs the excitement of gaining it. Studies in behavioural finance suggest that while working individuals may accept a 2:1 reward-to-risk ratio, retirees often demand a 4:1 or better, reflecting a deeply ingrained desire to preserve capital over chasing aggressive returns.

The goal shifts from accumulation to preservation, and with concerns about longevity risk — the fear of outliving savings — retirees prefer instruments that offer steady, secure payouts over time.

While stocks and mutual funds may outperform fixed deposits in the long run, FDs offer something equally valuable for retirees: financial stability. Their ability to provide a predictable income stream, protect capital, and reduce anxiety during market fluctuations makes them a cornerstone in many retirement portfolios.

The choice isn’t about chasing the highest returns — it’s about aligning investments with life stage and risk tolerance. For retirees, that often means leaning into the safety of fixed deposits, even in a world full of higher-yielding options.