To grow your money you have to make your money work. So to grow your money you have to invest it in some investment Vehicle.
Fixed Deposits is one of the investment vehicles that we will discuss today. Fixed Deposits have a very good reputation in our Indian households. We have always been said by our elderly to invest in F.D’s to grow our money.
The second Investment Vehicle that we’ll discuss is Mutual Funds which has been catching up in popularity from the past few years and which has been often looked down upon in our country due to the market risk associated with it.
What is a Fixed Deposit?
1. Fixed Deposits is an investment vehicle that is not linked to stock markets, it is a scheme offered by Banks and some NBFC’s (Non-Banking Financial companies)
2. In Fixed Deposits you deposit a certain lump sum of your money and get payouts according to the interest rate and according to your period that you have specified that is monthly, quarterly, Half-yearly,
3. One of the best benefits of Fixed Deposits is once you are locked in for a certain period of time with your lump sum money your interest rate would not change and certainly this is best for investors who don’t like to take any risk with their money.
What is a Mutual Fund?
1. Mutual Funds where a group of investors come together and pool money and invest in securities like Stocks, Bonds, Government Securities and other assets.
2. Usually Mutual funds are funds that are made up of public money and those funds are managed by Professional Fund Managers who have years of experience in Such type of Asset Class.
3. Best benefit of Mutual Funds is even if don’t know anything about the stock market or money market you can invest in a mutual fund and stay stress about your investment because it is managed by someone who has years of experience in the markets.
We’ll have to evaluate mutual funds and fixed deposits on these 5 things:
- Returns
- Inflation Effect
- Charges
- Taxation
- Things to consider
1. Returns
Returns are considered to be the most important part of any investment.
Current Returns for the top banks of India are as follows:
Now Coming to the Mutual Funds Returns.
Now, these are the returns of the Top Mutual Funds in our Country.
Now, these returns fluctuate a lot but on average, the 5-year average return for equity-based mutual funds is 13–14%.
For Debt Based Mutual Fund is 9–10%.
For Tax Saver ELSS MF is 12–13%.
2. The Inflation Effect on Returns.
Now, this is the topic which most people don’t cover and it actually affects your returns in a very significant way.
To understand this we have to understand what inflation is?
Inflation is an invisible phenomenon that degrades the value of money every passing year. And inflation rate is at which inflation affects your purchasing power
For E.g. The value of 100 rupee note is ₹100 today but the value of ₹100 will be ₹96 if the inflation rate is 4% that means you are paying the same 100 rupee note and getting the goods worth ₹96 next year.
Source: Statista
The current average inflation rate for 2020 is around 4.76%
Now the average Savings rate for Fixed Deposits is 5.50% that we have taken.
Now excluding tax it will be just 0.74%.
Now we would want to know how much time it will take to double the money for that we apply the rule of 72.
72 divided by the number of returns will tell you how many years it will take to double your money:
72/0.74 = 97.27 years.
That number is Shocking Isn’t it? Now, what if we take that money and invest in fixed deposits for 5 years.
Now the Number that we will take will very optimistic.
Average Return Taken = 7.5% on Fixed Deposits
Tenure = 5 Years
Fixed Deposit = Rupees 10 lacs
Now let’s Calculate the Amount of money that we will get after 5 years of continuously investing in Fixed Deposits.
Now It is Compounded Annually At Cumulative F.D that means if you don’t take payouts Monthly, quarterly, Half-Yearly, Annually.
If you take payouts the amount may vary.
Now the amount that you would get after investing 10 Lacs for 5 Years would be ₹1,435,629. This is before considering inflation into account.
Now let’s take inflation into account:
Average Return Taken = 7.5% on Fixed Deposits
Tenure = 5 Years
Fixed Deposit = Rupees 10 lacs
Inflation taken = 4%
Now the amount that you would get after investing 10 Lacs for 5 Years would be ₹11,87,689 when we consider inflation into it.
It has taken a hit of ₹ 2,47,943
It means that 14,35,629 would have a purchasing power of 11,87,689
Now let’s Calculate it on Mutual funds:
Tenure = 5 Years
Lump-Sum Amount = Rupees 10 lacs
Average Returns Taken = 13%
Now the amount that you would get after investing 10 Lacs for 5 Years would be ₹18,42,435. This is before taking inflation into account.
Now let’s take inflation into account:
Average Return Taken = 13% on Mutual Funds
Tenure = 5 Years
Lump Sum Amount = Rupees 10 lacs
Inflation taken = 4%
Now, the amount that you would get after investing 10 Lacs for 5 Years would be ₹15,38,623 when we consider inflation into it.
It has taken a hit of ₹ 3,03,812
It means that 18,42,435 would have a purchasing power of 15,38,623.
This is how inflation affects our returns now imagine the hit that we will take investing for a period of 20 – 30 years that amount would be 10’s of lacs.
3. Charges
For F.D
- Premature Withdrawal penalty is very high for Fixed Deposits.
- On an Average it is 0.50% for withdrawal within a year and after that for the period of 1–5 years it is 1.00%.
- 1.00% on 6–7% F.D is a very high charge that is 14–16% of your Returns.
For Mutual Funds
- For Mutual Funds there is no Entry charge for most of the mutual funds.
- There is Exit load of 1% usually when you sell your units within 1 year of buying them and after that there is no Exit load.
- There is expense ratio in mutual funds which is a fee to the mutual fund house for maintaining or handling your money and that depends upon the plan that you taken.
- Lesser the Expense ratio it is better, so it is usually preferred to go with direct plans rather regular plans to save up to 1% of the expense ratio.
4. Taxation
For F.D
- TDS (Tax Deduction at Source) will be attracted at 10% if the interest income is more than ₹40,000 and it is more than ₹50,000 for Senior Citizens. And if PAN is not provided TDS will be 20%.
- The interest income is added to your total income and if your total income is below ₹2,50,000 No TDS will be Deducted.
- In that Scenario you have to submit Form 15H for Senior Citizens and 15G for Non Senior Citizens.
- ELSS (Equity Linked
For Mutual Funds
For Equity-Based M.F’s
- 15% STCG (Short Term Capital Gains) If you sell your M.F units before 1 Year.
- 10% LTCG (Long Term Capital Gains) If you sell your M.F units after 1 Year.
- ELSS (Equity Linked Savings Schemes) or tax saving mutual funds and these help to save tax of upto 1.5 lacs under section 80C.
For Debt Based M.F’s
- 20% LTCG (Long Term Capital Gains) if holding period is more than 3 years and it will be taxed according to tax slabs if holding period is less than 3 years.
- Indexation benefit appliers if holding is more than 3 years. Indexation benefit is adjusting price , wage in accordance to inflation.
5. Important things to consider while investing in these two assets.
For F.D
- Banks that you are investing in should one of the top banks due to recent scenario in public sector and co-operative Banks.
- Always Nominate a member of your family so in an unfortunate event of death the person can claim the amount.
For M.F
- At least 5 years of Returns information should be there to evaluate a fund.
- Fund Managers History and his or her previous performances and experience.
- Companies that the fund have invested in should be top companies if you remain to invest in it for a long time.
- Sectors that the fund have invested their most of the money should be the sectors that are on boom.
- AUM (Asset under management) is the amount of money that mutual fund is handling under that scheme this amount should usually be on a higher side of 3–5k crores or more than that.
- Risk associated with that fund should be in tangent to your age, period and your goal.
So these are some of the things that you should look into while investing in fixed deposits and mutual funds.
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