Alternative to Fixed Deposits

Last Updated : Jun 20, 2019

RBI cuts repo rate by 25 basis points for 3rd time in a row for this calander year and one can hope for more rate cuts in future this is bad news for the people who are dependant on fixed income instruments, this can be good news for borrowers but not good a news for your Fixed Deposite savings in your bank.

You are getting merely 2.5-3.5 % on your savings and 5-7% on other fixed deposites instruments

So what is an alternative to Fixed Deposit? Where I can get higher returns with less taxation and my principle amount is also protected.

Yes you have in the form of Liquid Fund and Ultra Short Term Bond fund.

Liquid Fund and Ultra Short Term Bond fund are the only alternatives, these fund will give you higher return, good liquidity, even if Ultra short Term Fund in 3 years gives you same return as fixed deposite the taxation on this will be far lower because it will be treated as capital gain and capital gain is taxed at lower rate than marginal rate of taxation (your principle amount will be reasonable protected) this makes the investment return very attractive.

In case of Fixed/Savings with banks you have to pay tax every year on interest you have earned for that particular year if it exceeds Rs. 10,000 than the bank deduct TDS at 10% and above this if your PAN details are not with Bank than it will deduct 20% this also mean some part of your investment is not available for compounding as this some part is already deducted as tax every year from your investment.

Fixed Deposit in bank as name suggest has a fixed time period so if you require money and you want to close FD premature you need to pay penalty also you lose the expected return, while MF will charge you minimal exit load if you redeem within a year apart from this funds can be withdrawn any time without any exit load as MF’s are heavily liquid instrument. If you remain invested in MF for more than 3 years than the gains are considered as long term capital gains and are taxed after indexation here inflation adjusted return are taxed.

Another point is looking at India’s consumer price index rose to 3.05 % yoy so FD’s can’t beat inflation the way interest rates are coming down while Banks are paying 6.5% interest on their FD’s with inflation going higher due to Food prices, monsoon effect and several other factors also India’s consumption story is not looking so good. Debt funds give advantage over this as these funds holds government securities, treasury bills, commercial papers and other money market instruments so investing in debt fund is to earn interest income and capital appreciation and here in debt fund the interest rate you will earn at maturity period is already fixed that’s why they are also called “fixed-income” instruments or funds.

MF’s behaves the way Market desires and impacted by market volatility but these funds are manged by professional fund managers they try not only to protect investment but also to grow the fund. MF investment are based on individual risk capacity and the investors goal in mind.

Not only predictable returns and tax benefit Liquid Funds gives you convinces and negligible volatility, for many AMC’s/ Fund companies you can invest and redeem these liquid funds using smartphone apps so you can invest by transferring money from you bank account in 10min and same redemption can be done within 5min.

But before entering to MF investment one should always consult financial advisor.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh