India’s most prefered investment tool is FD, but can it provide the inflation-beating returns
The concept of “My money is safe in my Bank account ” has been followed from generation to generation when Interest rates were 12%.
Given the current FD interest of hardly 4-5% and steep inflation rate @ 6%, can your FD beat it to give you bang for the buck? Let's find out.
We all are aware of how FD works, For those who are starting out, hear me out… Let's say you have 1Lakh rupees and you keep it in the bank for a certain duration of 1 year for a 5% Interest rate. For banks to give 6% interest, what they do is take that money and invest in low-risk projects such as govt infrastructure projects or govt backed projects in a safe way. The small %ROI derived from such investment is passed on to consumers who park their money in the bank. Now you know how FD works, let's get into mutual funds.
Mutual Funds are an accumulation of many individual company stocks such as Infosys, Exide, TATA and many other companies. When you buy a mutual fund for a certain amount, you buy a certain portion of those company stocks. In many cases, the mutual fund's investment return on average of 12% over the long term, as companies reinvest that money in projects which generate revenue.
We all aware of one famous line “Investment in mutual (I will give you 5 second, complete the sentence in the comments section. ) ”
Let me complete for you, “Investment in mutual funds is subject to market risk. Please read the brochure for more details”
We have seen a glimpse on Mutual Funds. we shall explore in future videos to come.
We shall evaluate your investment in three factors - Returns, Liquidity, and Tax Returns. I will share another factor at end of the video as it determines your capability to invest.
1.Returns: As I explained in the previous section about FD & mutual funds and how it works, it's very clear that Mutual Funds return more bang for your buck. But why are people not investing in mutual funds?
As in FD, banks guarantee return upfront on your money invested for a certain duration. But where as in mutual funds there is no guarantee on your investment and is governed by stock markets up & down. But when investments are considered for a long term the ups & downs will average out and give a better return. Patience is a most important asset while investing in the stock market.
2.Liquidity: Mutual funds are highly liquid. The units can be redeemed at any time with a few clicks of the buttons and the money will be deposited to the bank account within two-three working days with almost no charges when selected debt funds are chosen. Whereas, if the FD is broken before the Maturity date then a penalty of 0.5 to 1 % needs to be paid back to the bank. This penalty amount will be deducted from the return amount.
3.Taxability: A true investor will look into the return after paying taxes. In the case of FD, the amount generated will be taxed as per your tax slab. If you fall under the 20% income tax slab then you will pay 20 percent tax on FD return. This applies to people falling under 30% as we
We shall consider two aspects :
In long-term investment, long-term capital gains are levied on debt-fund investments, here irrespective of your income tax slab, you need to pay 20% tax.
Whereas short-term investments less than 3 years are taxed as per the income tax slab of the investor.
If you have made it to the end of the video, it means you really want to take control of your finances.