By Dheeraj Agrawal , Communication Professional
This question crops up in almost everyone’s mind when he or she decides to start investing. To be frank, the answer of this question differs person to person. But as an informed investor, you must devise your investment strategy after accounting for various factors. And, the most important thing is to evaluate your own needs and risk appetite before you invest.
Before proceeding further, let’s have a look at the interest rates on FDs of some major Indian banks:
SBI 2.90- 5.40%
ICICI Bank 2.75- 5.50%
HDFC Bank 2.75- 5.50%
Axis Bank 2.75- 5.50%
Kotak Mahindra Bank 2.75- 5.25%
Source- Banks website
These rates vary as per the tenor of your fixed deposits, which usually ranges from 7 days to 10 years. Moreover, the senior citizens are given 0.5 per cent more interest than general depositors.
But it is quite clear from the table that you can’t get more than 5.50 percent annual return from banks. In such a situation, the question becomes important whether one should invest in FDs instead of mutual funds? The thumb rule is that if you want to invest for a short period, such as a year-and-a-half, and after that use that money for buying a house, marriage or for the education of children, then investing in a bank FD should be considered . But if your investment period is long, like five, seven or ten years or even more, then mutual funds are considered better option than FD. Here too, you can choose the mutual fund schemes that are suitable for you, keeping in mind your ability to take risk and financial goals. For example, if you want to invest for retirement and are not afraid to take risk, then you can choose equity or balanced fund.
No doubt, your investment in pure equity or balanced fund schemes is subject to the risk of stock market fluctuations. This means that you may or may not get the expected return on your investment. But if you see the annual returns chart of various equity mutual fund schemes over last 5 years, you will find that the top funds have given return in the range of 9 to 12 per cent per annum. Even hybrid or balanced funds have given better returns than FD in last 5 years. The annual returns for top 5 schemes in this category ranges between 6.8 to 8.7 per cent.
Now, there is one more benefit in investing in MFs with comparison to FDs. You must understand how they are taxed . If equity investments are sold before one year, the fund returns are considered as short term capital gains (STCG). These are subject to short term capital gain tax of 15%. Equity investments that are sold after one year are treated as long-term capital gains (LTCG). The LTCG of up to Rs. 1 lakh is tax-free, whereas gains over Rs. 1 lakh is subject to LTCG tax of 10%. Equity oriented balanced, and hybrid funds, in which at least 65% of the assets are invested in equities, are also taxed the same way as equity mutual funds.
But, in the case of fixed deposit returns, the gains will be taxed as per your tax slabs. So, if you plan to invest your money for a longer term, even if the return from your FD and mutual fund scheme is the same, the tax liability will be much lesser in mutual funds.
Having said that, I must reiterate to new investors that you must take your decision based on your risk appetite, time horizon, and investment goals. And, to existing investors, I would say that if your investment has been made keeping in mind any financial goal, then take help of your financial advisor before tampering with it.
