With decrease in bank interest rates on fixed deposits and savings bank accounts, there comes a threat of reduction in the earnings from fixed deposits for most of the people around the country. If numbers were to be believed, the reduction is already more than 25% of what people used to earn a few years back.
Certain banks have lowered the savings bank account interest rate to 3.5% and fixed deposit rates are now around 6% (1 year timeframe). Such alarming rates bring in the fear of losing on what hard earned money could have grown into, otherwise.
Is there a solution to prevent your money from drowning in such deposits? Yes, there is. Mutual funds can come to rescue for the money which is being eaten up by low interest rates (& ofcourse, even inflation & taxes). Low returns with high tax incidence fetches away the little bit of desire to invest in fixed deposits anymore.
Major benefits that come from investing in mutual funds would be the ease of investment, professional management of your money, good returns and tax efficiencies.
Alternative to Savings Bank account
If you want to substitute and gain better than from savings bank account, then liquid mutual funds are the options to be seen. They ensure stable rate of return and they also possess the benefit of liquidity unlike fixed deposits.
You can redeem such funds whenever you wish to and the money gets transferred to your savings bank account within minutes; which means hardly any loss on liquidity. You can withdraw upto Rs 50,000 anytime, ie, 24×7 transactions. However, for any withdrawal higher than that, the funds would be transferred within 1 (one) working day to your bank account.
Investing in these liquid funds is also just a piece of cake. Netbanking transactions, apps, help in seamless use of liquid funds & enable you to get better returns than banks.
Alternatives to Fixed Deposits & Recurring Deposits
For people who invest in Fixed Deposits, the alternative would be to invest in Debt Mutual Funds, which give better returns than FDs and are tax-efficient as well, with very low risks.
Investments can be done in
- Utra-short term debt funds (where investment time horizon is upto 1 year),
- Short term debt funds (where investment time horizon is upto 2 year),
- Long term debt funds (where investment time horizon is 3 years or above)
Similar to FDs, the returns from the above type of debt funds vary basis the time horizon that you invest with, but will not be fixed in nature. The returns vary from 6% to 10% and higher returns may also come in depending on the credit calls taken by the mutual fund managers.
However, the benefits don’t end here. Much important to any of the investor is the Tax benefit provided by mutual funds.
Taxation in FDs vs Debt Mutual Funds:
- The income earned from fixed deposits is classified as interest income. Interest income is taxable every year under the Indian taxation system in which you have to pay tax on whatever you have earned.
- On top of that, you will bear TDS @10% if interest income exceeds Rs.10,000 and if your PAN is not updated at the bank, they will deduct 20%.
- Due to TDS deduction, there is no compounding of the earning made in FDs, whereas, in the mutual funds, there is no tax deducted and tax has to be paid when the amount is withdrawn only.
- The returns under mutual funds are classified as capital gains which strengthens the power of compounding.
- Moreover, if you redeem your mutual funds after a period of three years then you pay long term capital gains taxes with the benefit of cost indexation, similar to your property transactions, wherein the taxes may not just be nil, but the indexation benefit could sometimes result in making long term capital losses, which can be adjusted against other long term capital gains, thereby, making more savings & earnings for you.
Concluding from the above facts, it is high time for the investors to look out from fixed deposits to mutual funds in order to safeguard their money; more importantly grow their money.
To know more, contact us at – firstname.lastname@example.org / 080-40463150
Written By – “Mohit Bajaj & Meghna Jain”