And Ladies and Gentlemen, We have a clear WINNER……
All of us have invested in Fixed Deposits (FDs) offered by Banks and have always felt nice about it. However, you must have surely heard a lot of talk about investing in Debt Mutual Funds.
Let’s look at each aspect of Fixed Deposits vis a vis Debt Mutual Funds and then decide for ourselves.
FDs give guaranteed returns
Yes, FDs give guaranteed returns whereas Mutual Funds don’t. We concede that FDs, indeed, do have this unique advantage over Mutual Funds. But, wait a minute!!! Debt Mutual Funds, over time, have given much better Pre-Tax and Post-Tax returns than FDs, year after year. Check out the Pre-Tax and Post-Tax returns of “Top Debt Mutual Funds” and our “Better than FD Mutual Funds” before you decide whether FDs returns score over Debt Mutual Funds or not.
FDs are safe
Yes, FDs are one of the safest financial products around. Though, the Non-Performing Assets (NPAs) of the banks are rising, and only FDs under 1 Lakh are insured. Still, we always have this belief that the Banks would not fail. Most of the Debt Mutual Funds and Liquid Funds also invest in very secure and safe securities and instruments. We have hardly come across any defaults in the Debt Mutual Funds space which have hurt the customers. So we can say that on “safety”, it is probably a tie between FDs and Debt Mutual Funds.
FDs are liquid
Yes, FDs are liquid. We can always withdraw money from FDs prematurely whenever there is an urgent need. But do you know that this comes at a cost? There is a 1–2% penalty (depending on the bank) on premature withdrawal of FDs. So if you were to get a Pre-Tax return of 7%, on premature withdrawal you would get only 5–6% Pre-Tax return (plus you get taxed at 33% on interest income). Many Debt Mutual Funds do not have any such penalties on withdrawal. A smart investor can carefully choose such funds for investment. We have made this easier for you. Visit our “better than FD” Mutual Funds page to check it yourself.
FDs are taxed
Yes, interest income from FDs is taxable as per your income slab. So if your taxable income is more than Rs 10 Lakhs, the interest income from FDs is taxed at around 31%. This post-tax return from FDs does not even beat inflation. And this is where Debt Mutual Funds are hands down winner. All Debt Mutual Funds (including Liquid Mutual Funds) have a massive taxation benefit. Long Term Capital Gains tax (if you hold Debt Mutual Funds for more than 3 years) for Debt Mutual Funds is only 20% with Indexation benefit. Indexation benefit is adjusting for inflation before taxing for Capital gains. In fact, post indexation tax rate on Debt Mutual Funds can be as low as 2% as opposed to 31% tax rate on Fixed Deposits. So it is actually up to us to select tax-efficient investment products.
To Summarize, Debt Mutual funds have given much better post-tax returns, are as safe and much more Liquid than Fixed Deposits. I am, for sure, never investing in FDs again. Would you???