By Nivesh Gyan 8 AugustCategory: Better Than FDs
A common question in investor’s mind: Interest on money lying in savings account is too low and if I park that money in a fixed deposit, return is not great there too plus there is no flexibility. What should I do?
The answer to this question for a conservative investor is “Invest in Debt Mutual Funds”.
Let’s understand this with an example:
Debt Funds are better than FDs as they offer better post-tax returns
|Particulars||Debt Funds||Fixed Deposits|
|Rate of Return||8%||7%|
|Tenure||3 years||3 years|
|Value at the end of 3 years||3,78,000||3,68,000|
|Sum indexed with the Cost Inflation Index (provided by the Income Tax department)||3,57,300||–|
|Amount Taxed||20,700 (3,78,000-3,57,000)||68,000|
|Tax to be paid||4,140 (20% of 20,700)||20,400 (30% of 68,000)|
|Total Return after Tax||73,860||47,600|
|Debt Funds||Fixed Deposits|
|Investment option||Can invest via both SIP and Lumpsum route||Can invest only in Lumpsum|
Ultra short-term funds if you have short term surplus for a time period of approximately 0 to 9 months.
Credit Risk Funds if you are looking for lucrative returns and are aware of the fact that these funds invest at least 65% of their investments in less than AA-rated paper. These funds typically generate 2-3% higher returns compared to risk-free papers as they take higher credit risk by investing in lower-rated papers. Market price of such securities goes up as and when their ratings move up, and they offer a benefit of capital gains.
Fixed Maturity Plans (FMPs) are apt for 3 years if you are looking for predictable returns for a particular tenure. Their objective is to provide steady returns over a fixed-maturity period and are suitable for investors who wish to avoid interest rate risk and are willing to invest in safer debt instruments which would earn marginally higher than savings account and bank fixed deposit.
|Holding Period||Income Treatment||Tax Implication|
|Less than 3 years||Short-Term Capital Gain||Added to income and taxed as per individual’s tax bracket of 10%, 20% or 30%|
|More than 3 years||Long-Term Capital Gain||20% with indexation benefit on cost and 10% without indexation benefit|
Please contact Nivesh.com to understand in detail about debt funds and identify the fund that meets your time horizon and risk appetite.