Indians have traditionally been very conservative investors. In fact most of the Indians don't even have a financial plan. As such banks become their first choice to save money.
The result is that today Bank Fixed Deposits, FDs, aggregate about Rs 12-13 lakh crore. To put this figure in perspective, mutual fund deposits is around 1/10th at about Rs 1.5 lakh crore. This is in sharp contrast to the US where the assets under management of mutual funds far exceed the bank deposits. As regards equity, only about 2% invest in the equity markets.
Mistakes People Make
Apart from not giving financial planning and investment the due importance, people do not fully appreciate the impact of inflation and taxation on the returns from their investments, and are more comfortable with 'assured returns' concept thereby ignoring anything which talks about market-linked returns.
People fondly look back to 'so called' good old days when interest rate were around 10-12%. But they forget the fact that the inflation then was around 8-10% and tax rates were around 40-50%. The effective returns today, therefore, may not be significantly different from those in the past.
As such people have not given the mutual fund schemes - especially the Fixed Maturity Debt-based ones which match Bank FDs in risk profile and liquidity - the due importance in their portfolio.
Numbers tell it all
The calculations below will show even if banks were to offer higher interest rates as compared to expected returns from mutual funds, the post-tax returns of mutual funds may be higher than Bank FDs, depending on a person's tax bracket, without compromising on the safety of capital & returns.
| |
Bank FD |
Annual Plan of Mutual Fund |
| |
1 year |
Dividend |
Growth |
| |
|
|
without indexation |
with indexation |
| Amount invested |
100 |
100 |
100 |
100 |
| Interest rate / Yield |
6.00% |
5.50% |
5.50% |
5.50% |
| Amount at end of 1 year |
106 |
105.5 |
105.5 |
105.5 |
| Gains |
6 |
5.5 |
5.5 |
5.5 |
| Indexed cost (at 4.5% of indexation) |
NA |
NA |
NA |
104.5 |
| Indexed Gains |
NA |
NA |
NA |
1 |
| Tax Rate |
33.66% |
14.03% |
11.22% |
22.44% |
| Tax amount |
2.02 |
0.68 |
0.62 |
0.22 |
| Post tax returns - Amount |
3.98 |
4.82 |
4.88 |
5.28 |
| Post tax returns - % |
3.98% |
4.82% |
4.88% |
5.28% |
Another advantage of mutual fund is that provisions of TDS do not apply to them. We all are aware of the problems of TDS on interest earnings.
Therefore, we need to have a re-look at our Bank FDs vis-à-vis Debt-based fixed maturity mutual fund schemes and take the right investment decision. |
