Many investors are not aware of alternative of investing through Mutual Funds route and they prefer to invest only in Fixed Deposits(FD).
But very few investors know that only Rs.1,00,000/- is guaranteed by RBI if the bank defaults. Which means even Fixed Deposits are also not 100% safe.
Whereas in DebtMutual Funds investments get diversified in Certificate of Deposit (CDs), Corporate Bonds and Commercial Papers (CPs), Government Bonds etc. which reduces the risk.
The fixed rate of interest like in Fixed Deposits (FD) is not available in Mutual Funds. But same can be achieved by Systematic Withdrawal Plan (SWP). It is a fixed withdrawal amount from your Mutual Fund Scheme which could be weekly/monthly/quarterly. You can get money transferred to your bank account regularly. Once your corpus grows, you can use SWP to create a regular income for yourself.
Banks charges more for pre mature FDs whereas there are schemes like Liquid Funds where there are no such charges and money is transferred next working day in your bank account.
Returns in Fixed Deposit (FDs) and Debt Mutual Funds may seem same. But the difference is vast in Post-Taxed amount. The returns on FD is taxed as per individual tax slabs. For example,if the FD return is 9%. Post Tax this return is only 6.3%.(assuming person is in 30% tax slab).
In Equity Mutual Funds return that you get after your investment crosses 365 days, is TAX-FREE.
In Debt Mutual Funds after 3 years the tax is 20% after indexation.
|Particulars||Debt Mutual fund||Fixed Deposit (FD)|
|interest for 3 years||30,000/-||30,000/-|
|Tax Rate(after 3 Years)||20%||30.90%|
|Cost of Capital||1,00,000*1081/852=1,26,877/-|
|Long term Capital Gain||1,30,000-1,26,877=3,123/-|
|Tax to be paid||3,123*20/100=624.4||9,270/-|
|Post Tax Returns||9.80%||6.90%|
*cost inflation index of 2012-13 is 852
*cost inflation Index of 2015-16 is 1081
There are many Schemes of Mutual Fund which are capable of giving regular tax-efficient returns with Reasonable safety of Principal amount invested.
Fixed Deposit (FD) cannot beat inflation. Fixed Deposit (FD) shouldNOT be used for the investment purpose as the returns are barely above inflation rate.
Being a Certified Financial Planner, I suggest using Fixed Deposit (FD) for the instant liquidation needs only. In a regular household a Fixed Deposit (FD) of RS.20,000/- to RS.50,000/- is enough. For other emergencies I suggest to have Term-insurance and Medical Insurance for reducing the risks.