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FDs v/s Mutual Fund Investment

10
Feb

A) Time Period for Investment

Whether you should invest in bank FDs or MF, foremost thing is to decide your term of investment. If you are planning to go for a short term investment, our advise would be to better put your money in FDs, as you will get an assured return after maturity (say 8% – 9% as of now). However, if you aim to invest for a longer period (say more than 3 to 5 Years) you should better go for investments in Mutual Funds. If a correct MF is chosen, return can also reach upto more than 100%. A correct investment advisor can help you reach your financial goal by helping you choose the correct fund.

B) Capital Safety

Mostly people are worried that their capital should not get depleted at any cost in any given point in time and so a general public goes for putting their hard earned money in Bank FDs. However, if you are ready to take a risk of few percent, with a right investment advisor you can earn many more times of return than bank. So, think first what kind of investor you are.

C) Liquidity

Debt fund offers more liquidity to your money compared to FD

D) Tax on returns

This point is the most important to be kept in mind while planning your financial goal. You earn Interest on FD while you earn capital apprehension or Dividend income from Mutual Fund Investment. Consider the below points to understand the tax impact on the two:

  • Bank FDs are taxed at your maximum rate, however return from equity MF is free after 3 years.
  • Most hurting point is, in case of investment in FDs, tax needs to be paid even on accrued interest (interest that is earned but not actually received), whereas there is no such charge in MF income.
  • Consider the impact of compunding on the return arrived after paying tax, hence this sounds less but the impact is huge, when talking aabout long term one should not forget the time value of money.
  • For eg: Say, The rate of return is 15% and the value invested is Rs100 is invested for 20 years with tax rate of 33.99% (after applying surcharge and cess on 30% tax)
  • Case 1 Tax free investment
  • Case 2 Taxable investment

Value of Rs 100 at the end of each year

No. of year Tax Free (Case1) Taxable (Case 2) Cost of Tax
1 115 110 5
2 132 121 11
3 152 133 19
4 175 146 29
5 201 160 41
10 405 257 147
15 814 412 402
20 1637 661 976

So this is the power of compounding, which can never be ignored.

To conclude, if you are planning to invest for long term, go for equity MF and choose the best MF available in market, however, if your goal is short-term, better go for Bank FDs.

There are various types of MF available in the market, like Debt MF, money market and liquid schemes etc. Of these which type is beneficial for what type of investor and in what time frame, is dealt in another blog.