Tag: Fixed Deposit

10 Apr 2021
FD or growth

Who do you align with – Mr Hardcore FDs (HFD) Or Mr Growth Bhai (GB)?

The past year has been extremely volatile for most people. Many people lost their loved ones. Many others lost their jobs or other sources of livelihood. Two friends many of us have in common – Mr Hardcore FD (HFD) and Mr Growth Bhai (GB) – also faced some challenges in their own lives.

Before the pandemic struck, they lived in the same city, but as with many of us, they too relocated to their hometowns in the last one year due to the facility of working from home. They did keep in touch over calls and texts, often sharing news with each other they found mutually interesting.

In March 2020, when the equity market was tumbling down each passing day, HFD kept prodding GB to sell-off his equity holdings and move to safer asset classes like bank deposits (FDs)! GB did feel the stress but held on to his horses. Over time, his faith in equities was strengthened as the equity markets almost doubled over the next one year.

BSE Sensex movement from 1 Jan, 2020 to 1 April, 2021.

BSE Sensex movement from 1 Jan, 2020 to 1 April, 2021. Source: BSE

In March 2021, the markets again witnessed some volatility and took a fall of almost 10%. As HFD again started sending signals to GB to get out, the latter decided to have a detailed discussion instead to try and change his friend’s thought process.

“You need to stop panicking all the time, HFD. It is fine that you are a little conservative in your investment approach, but have you tried understanding the other side?” GB asked HFD.

HFD replied with conviction, “GB, I have learnt my finance lessons from the elders in my family and have trust in instruments like FDs that have implicit sovereign guarantee. I know what you are saying, but my elder brother tried his luck in equity till 2008 and burnt his fingers badly. Hence, I am even more cautious.”

GB was aware of such a mindset as he had had similar conversations with many people in the past. “Your brother burnt his fingers because he was trying to make fast bucks without a solid understanding of stock markets. When markets tanked, he panicked. You need to understand some basics of stock markets before you close out this excellent avenue from your investment basket,” he started.

Those who sell in panic, lose out much more. The market crashed in 2008, and then sharply recovered.

BSE Sensex between 1 April 2008 and 1 April 2010.

 BSE Sensex between 1 April 2008 and 1 April 2010. Source: BSE

“But people like me who invested in safe instruments like FDs did not lose out!” HFD retorted.

“At what cost? Look at the long-term trend. Time and again, several analyses have proven that long-term returns in equity are in double digits. On the other hand, FDs, though safer, always give a low return,” GB said.

“But still I count more on safety of capital,” HFD said.

To this, GB replied, “But HFD, when inflation and taxes are taken in to account, which anyway you cannot avoid, the returns from FD comes down even further. In fact, your FDs then become ‘assured risk’ – do you realise that?”

“Hope you are aware that the current FD returns are around 5% and the inflation is higher than that. This means that you are actually losing money. Add the tax that you have to pay on interest income at your slab rate, and your real returns go heavily negative. On the other hand, long-term returns from equity, implying what you invest for just more than 365 days, are not taxed up to Rs 1 lakh in a year, and even beyond that the tax is only 10%,” he said.

India Retail Inflation.

India Retail Inflation. Source: tradingeconomics.com

These numbers made HFD uncomfortable and he came back with the comfort and convenience argument. “It is a hassle to keep track of the equity market and understand when to invest and when not to invest or when to exit.”

“I would agree with you if you were talking about direct equity investment. However, we now have very convenient options like Mutual Fund that take care of all those aspects,” GB said, explaining how mutual fund managers take care of most of the aspects of equity investing. The rupee cost averaging through SIP investments, and investors being able to increase or decrease investments as per their own comfort and cash-flow, being some other big advantages.

“But a fall of 40-50% in a matter of weeks, like the one in March last year, still haunts me. What about safety of investment?” HFD asked.

“You are right, there should be some element of safety. For that you need asset allocation and invest some amount in safer investments like FDs or debt mutual funds. But putting all the money in FDs is actually a disservice to your hard-earned money. You are losing out on the growth in equity markets. The fall you referred to was mainly because of panic among investors, just like your brother in 2008. When so many people sell something, it is obvious that its price will crash. Anybody who looked it at that time as an excellent investment opportunity is right now smiling all the way to his bank” he said.

“Does it mean that I stop using FDs?” HFD asked.

“Not at all, HFD. This does not mean that you put all your money in equity or large amount in equity all of a sudden. But certainly, it deserves some more attention in your portfolio even if you are conservative” GB said.

HFD promised GB that he will think about the discussion.

Both agreed to discuss the details again next time, with some more real numbers from their own experiences.

03 Apr 2015
Can Your Bank FD or PFDSOPF match this

Can Your Bank FD or PF/DSOPF match this?

We are generally comfortable investing our money in bank FDs, PF/EPF/DSOPF and other fixed income instruments, always smug in the belief that our money is safe and will grow up adequately to meet our aspirations regarding self, spouse and children. However, we neglect the combined damaging effects of Inflation & Taxation from our calculations.

If your safer investments are tax-free (generally the PF/EPF/DSOPF, and Insurance policies), they should generate at least 8% per annum to merely neutralise long-term inflation and your money actually grows only if you earn beyond this. If the investments are not tax-free (all your bank and post office instruments including savings accounts, FDs, PO MIS, SCSS and RDs) and say, you are in 30% tax bracket, your investments should give at least 11.43% annualised returns for you to ‘break-even’. For 20% and 10% tax brackets, the minimum returns to break even are 10% and 8.88% respectively. We call this these the ‘Tread-mill’ rates! When you are earning this return, you feel you are moving fast. But when you get down from this tread-mill and take a reality check, you find you are not even  reaching the place where you started from – you’ve actually lost due to inflation and tax.

Have you ever considered Debt Mutual Funds as an investment? Debt funds generally invest in Govt Bonds, equivalents of bank FDs and Company FDs. They have no component of stock investments. When interest rates go down, while your FDs will lower the rates, the returns from long-term debt funds will actually rise. Even without that, currently long-term debt funds are clocking returns between 11-13% per annum. Also, if you remain invested in them beyond 3 years, you are likely to pay a tax of just about 5-7% after 3 years and maybe Nil tax after 4 years, going by the past 3-4 years’ performance and inflation statistics.

What about Equity Mutual Funds? You take stock market risks and get the risk-premium there. A large number of investors continue to believe that stock market movements can lead to a complete loss of your money if the markets do not behave. This happens only if you try very hard to achieve such a complete loss!Consider this – what was one of the worst financial year for Indian stock markets? Undoubtedly 2001-02. Twin Towers attack in USA took place on 11 Sep 2001 (9/11, famously) and the Indian Parliament attack on 13 Dec 2001. The BSE Sensex was 3604 on 30 Mar 2001 and 3469 on 28 Mar 2002. So if you kept your head when everybody else was losing theirs, there was literally no effect even in the worst of the crisis.

See the returns chart for the last financial year (FY 2014-15) published in Economic Times of 03 April 2015. Do you still think you can afford to leave out mutual funds from your portfolio if you want to meet your future financial commitments comfortably?The Best Performing Assets

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20 Jul 2012



Nobody likes to lose money. The most common refrain that I hear as a Financial Planner is – “I may not make much money, but I don’t want to lose any ever!” Why not – after all it is your hard-earned money, why lose even a bit of it? But then that person puts the very same money in a Fixed Deposit (generally of a bank, sometimes in a Company) for a few years, without realising that he has done exactly what he wanted to avoid!!

Let’s give it a closer look. Let’s say you have Rs 5 Lakhs which you want to invest in a safe place for 3 years. Let’s also say that your bank offers you a good 9.5% per annum (pa) rate of interest. You go ahead with the FD and expect the interest of Rs 1,42,500 three years later at 9.5% per year. But, when your FD matures, your bank deducts 10% TDS (Tax Deduction at Source) and when you file the Income Tax Return at the end of the Financial Year, the balance 20% tax also needs to be paid (assuming you are in 30% tax bracket). Thus, you actually get Rs 98,470 as the interest – amounting to just 6.56% per annum! Not only bank FDs, Post Office and Company FDs are also similarly treated tax-wise.

Can you do anything about it? If I were to tell you about an investment avenue which is almost as safe, gives you much better returns, is tax-efficient, may or may not have any lock-in period and you can keep adding or taking out money from it as you desire, what would you say? ‘Wow’! I am referring to debt Mutual Funds (MFs) here. You may be surprised. Aren’t MFs supposed to invest in stocks only? Not at all. In fact, out of a total of Rs 6.54 Lakh Crores invested in MFs in India today, approximately 70%, ie Rs 4.5 Lakh Crores or so is in Debt-based funds and only about Rs 2 Lakh Crores in Equity MFs!

The debt route in MFs

Debt mutual funds are like equity mutual funds. But instead of stocks, they invest in government bonds, corporate bonds, certificates of deposit generally of banks, commercial papers of companies and other fixed income instruments of varying maturities. They have lower risk than equity mutual funds; as a result they have lower returns too, but that is offset by the high safety that they provide to investors. Even though debt funds invest in fixed income instruments, the returns from debt funds are not fixed as in a bank FDs but vary as per the general interest rates prevalent in the economy. However, investing in debt funds like Income Funds which have longer maturity papers and the FMPs (Fixed Maturity Products) of long durations (1 to 3 years) give you interest rate protection over long periods.

Having seen the safety aspect of Debt MFs to be similar to bank FDs, let us go back to the original topic – how are they better than bank FDs. It is so due to their lower taxation rates as also indexation benefits; latter – if held for a period longer than one year. In case of Debt MFs, if the fund is held for less than a year, then its taxation on the interest (called Capital Gains in case of MFs) will be the same as a bank FD though rate of interest earned may be slightly higher along with the attendant advantage of the flexibility to take out your money any time. If the fund is held for a period longer than one year, the maximum tax rate applicable on the Capital Gain will be 10% if no indexation benefits are taken. If indexation is applied, it is 20% but your tax is reduced depending on the rate of inflation in the economy and there is likelihood that you may pay no tax at all! Let’s see how does it work?

In indexation, the cost of investment is raised to account for inflation for the period the investment is held, if the period of investment is anything more than One year.  This is done by using a cost inflation index number released by the tax authorities every year. For instance, take an investor who bought   debt fund units worth Rs 50,000 at Rs 10 per unit in March 2008. He then sold off all the units in April 2009 (after 13 months) at Rs 11.02, getting a return of 9.5% per year. Since the units were held for more than 12 months, it is termed as ‘long-term’. You have the choice of either paying tax at the rate of 10% or take the benefits of indexation, whichever is beneficial to you. Let’s see how indexation works. The base year for the cost inflation index number is 2007-08 (as the units were bought in March 2008), and the index number was 551. The year of sale is 2009-10 (as the units were sold in April 2009), the index number was 632. The notional cost for acquisition of the units for the purpose of tax calculation will therefore be increased to Rs 57,350 (50000*632/551). The sale price is Rs 55,100 (=5000 X 11.02). Since the notional cost price (as increased by rate of inflation) is more than the sale price, there is no gain and hence, no tax! Thus, even though investor has made a good gain, the cost inflation working (indexation) has wiped it out notionally. Had this investment been made in a Bank FD at same rate of interest and the investor was in 30% tax bracket, he would have paid a tax of Rs 17,026 on the gain. This phenomenon has happened due to high inflation – even if the inflation were low, the tax paid would be much lower than for a similar Bank or Company FD.

The end of a financial year gives an opportunity to investors to get this double benefit, using the indexation route. The double indexation benefit is for investments that need not be locked in for a two-year period, but for at least over a year. However, beware that this double indexation benefit may get abolished in the current form in new Direct Tax Code (DTC) and indexation may get linked to actual period of holding.

Options in Debt MFs

Debt funds have a fairly wide range of schemes offering something for all types of investors. Liquid funds, Liquid plus funds, Short term income funds, GILT funds, income funds and hybrid funds are some of the more popular categories. For long term investors, debt income funds provide the best opportunity to gain from interest rate movements. There is also the short term plans for investors looking to invest for periods of 1-2 years. Liquid funds can be used for very short term surpluses, as a better alternative to surplus money lying in savings bank account. Fixed maturity plans (FMPs) have been gaining in popularity lately as they minimize the interest rate risk and offer good returns to debt investors. Those emphasizing shorter term securities and higher credit quality tend to be more conservative than ones offering longer maturities and lower credit quality. More conservative funds generally hold out the prospect of reasonable returns and low risk exposure, while aggressive funds seek to offer higher returns in return for accepting higher risk exposure. As the relative risk profile of such securities is higher, investors in such bonds expect higher income streams compared to higher-rated bonds.

Summarising on Debt Mutual Funds

In the investment world, it is not an either/or scenario between debt and equity. Basic principle of sound investing postulates a diversified portfolio. Though debt funds often may just be the difference between being able to retain the profits and losing it all in the next round of volatility, the main advantage of debt funds is relatively lower risk and steady income in addition to liquidity of investments, professional fund management expertise at low costs besides diversification of portfolio to have a balanced risk return profile. Debt funds also tend to perform better in periods of economic slowdown. We believe that debt should be looked upon as an effective hedge against equity market volatility, which lends stability in terms of value and income to a portfolio. Some hybrid debt schemes take exposure in equities allowing investors to participate in the stock markets as well. As with any mutual fund, investors should look at factors such as performance track record over interest rate cycles, transparency and investment style consistency, before investing in a debt fund.

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