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How debt funds score better than Fixed Deposits

How debt funds score better than Fixed Deposits?

Will : legal declaration of how a person wish his/her possession to be disposed after their death

Fund : An amount of money saved or collected for a particular purpose

Return : Profit or loss derived from an investment

Investor : An investor is any party that makes an investment.

This is a type of mutual fund, where your funds will be invested in fixed income securities like debentures, Treasury bills, etc.,.

Wealth is accumulation of resources or as on date value of assets a person own. Commonly Net worth is the measure of Wealth of an individual.

It is the raise in the value of Consumer Price Index. That is the rate of increase of the price of a goods or services.

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.

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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.

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