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How debt funds score better than Fixed Deposits

How debt funds score better than Fixed Deposits?

by Holistic Leave a Comment | Filed Under: Mutual Funds

Capital protection is the first thing an investor needs, before he invests in any scheme. It is with the hope to get protection and returns, most people choose Fixed Deposits to park their hard earned money. But to what extent your money is safe in banks? Or to be clear, do bank deposits really keep your capital intact? Let’s assume that your money is in the safest place, but how many of you know that a small increase in inflation graph could eat up your bigger wealth?

Other than this, FDs are risky due to two reasons-

1. Taxes

2. Risks of fluctuating interest rates in the long term.

Dive into the below sections to conclude whether Fixed Deposits make you richer or poorer.

What you really earn on Fixed Deposits?

In order to make you understand the image of FDs, the below illustration is created.

For instance, Rs. 20 helped you buy 10 kg rice in 1975. If one had saved the amount in FDs with a bank, which has an average 8.25% rate of interest, it would have given to you Rs. 190 today. You must be happy to hear this. But that’s just one side of the coin. If you analyze carefully, 10 kg rice in today’s price will cost you not less than Rs.500. This means if you get Rs. 190 on FD, you will be able to buy only 3.5 or max 4 kg rice as compared to 10 kg earlier. So, to conclude, you are losing here.

This shows how inflation drains our wealth deposited in FDs. This applies to other consumer products as well.

How much tax do you pay on Fixed Deposits?

People, who invest in FD, think that it’s a onetime investment and they don’t need to check it constantly.

Unfortunately, that’s a wrong notion. Since, if you don’t know, let me tell you, FD returns attract higher taxes.

Fixed income mutual funds are a better investment instrument that is meant for people who don’t want to risk their money. It not only beat inflation, but also saves in terms of taxes. The tax on FD is about 33%. If a person had invested Rs. 20,000 in an FD on April 1, 2012, he/she will take home 21,172. On the contrary, if an investor invested the same amount in an accrual fund scheme with a one-year maturity, he/she will take home Rs. 21, 740. Isn’t it a great deal?

Are Fixed Deposits lucrative than Mutual Funds?

The returns of mutual funds are anytime better than fixed deposits. The bank usually offers the lowest possible rates on their deposits, in order to increase their gross spread. The actual difference between the rate at which banks offer loans to borrowers and rate at which they raise deposit is generally 4-5%. However, the fee is lower for mutual funds, it ranges between 1.0 – 1.5%. The SEBI is always present to regulate MFs to make sure they charge nominal fees.

All Tax-free products are not risk-free

There is a strong liking among some investors, when it comes to purchasing 10 or 20-year long tax-free bond. What attract them, are an 8.5% tax-free coupon, and the post-tax rate of interest that is 12.6%.

Do you think the inflation rate, at which you are investing, will be the same after 20 years? Obviously not! The inflation rate is increasing every year. Emerging economies are prone to abrupt changes in money supply and output. In such case, if you lock your money for a period of 20 years, you think the return which you’ll get will be sufficient to cover inflation after 20-years?

The interest rate may go up in the future. If you lock your funds in tax free bonds, then you will not have an opportunity to take advantage of the rising interest rates. An accrual based debt fund will help you in taking advantage of the rising interest rate scenario as well in the long term.

The Bottom Line

Accrual based debt funds which matches your time horizon of investment are beneficial and helps beat inflation. These funds give tax benefit, and are a safer alternative to FDs. Accrual funds help to safeguard your capital and generate moderate returns. The journey towards wealth accumulation to be easy for you, it is recommended to have a personalized financial plan.

If you have any comments or questions, write them in the comment box below.

Or are you interested in creating a Comprehensive Financial Plan for your financial goals?

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Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
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