Savings Superhero: Debt Funds or Fixed Deposits?

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Savings Superhero: Debt Funds or Fixed Deposits?

Vaishali Lohia | January 29, 2018 13:24 hrs

India has always been a country of savers. Savings are the income which is set aside after meeting the expenses. This habit indeed helped the nation overcome the times of global recession which followed the subprime crisis in the United States. However, majority of the savings in India find their way into bank and post office deposits. Even amongst the traditional investment options, fixed deposits have been superhero for savings so far as it is seen as a conservative product with fixed returns with flexibility to invest across time periods. However, with the interest rates falling, it makes sense to look for further investment options giving better returns.

With the evolution of financial markets, debt funds are emerging as an interesting alternative to fixed deposits. Debt Funds are a similar kind of fund which is offered by the Mutual Fund industry having traits such as: higher rate of annualized return, ease of liquidity, paperless investment, etc. Debt funds invest your money in fixed income products and hence the rate of returns can therefore be predicted to some extent. The professional fund managers also try to maximize the returns by taking benefits of the interest rate changes.

People had been saving money in high volume in fixed deposits because of its safety and guaranteed returns, but when it comes coupled with better tax rates, it indeed becomes easier for an investor to decide. While the interest from fixed deposits is taxed at maximum marginal rates of tax applicable to the taxpayers, benefits of indexation and preferential rates of tax are available to the investors in debt fund if investment is retained for a longer period (i.e. more than 3 years).

The illustration below will help you better in understanding the better of two:

Mr. Ram has Rs. 10 lakhs as savings and he wants to invest the same either in bank FD or in Debt Funds. He compares the two options and finds the following difference:

Particulars

Debt Funds

Bank Deposits

 
 

 

With Indexation

Without Indexation

 

Amount of Investment (Rs.)

10,00,000

10,00,000

 

Post Expenses Yield (PA)* (CAGR)

7.50%

5.75%

 

Tenor (in years)

5.00

5.00

 

Amount at the end of investment period ( Final Pre-Tax Maturity Amount)

1,435,629

1,322,519

 

Gain

435,629

322,519

 

Tax Rate

20.60%

30.90%

 

Tax

50,390

99,658

 

Post Tax Gain

385,239

222,861

 

Total Amount Realized

1,385,239

1,222,861

 

Therefore, with better yield and preferential taxation, debt funds indeed emerge as a clear winner in the race to become the savings superhero. Hence, it’s time to invest your savings smartly with Debt funds.

 

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