Almost every one has a fixed deposit. Very rare to find a family with a reasonable income above 3to 4lacs not to have a FD. This the first savings / investment, any one would think of. Now that RBI is reducing interest rates and this has a bearing on our FDs which are maturing in the near future.
What has changed recently.
a. The interest rates have come down by 50 basis points in the last three months ie 0.5%
b. With the changes in RBI rules, companies have stopped accepting fixed deposits.
c. Only companies under NBFC category ( Non banking financial companies) can accept fixed deposits. These are finance companies like sundaram finance, Bajaj / Mahindra finance, Shriram transport to name a few.
d. Even Jewellery firms have trimmed their chit schemes and hence there is little option for investors.
So Is there a better option for an investor who is normally renews FDs year after year.
While there are different types of risk, the one associated with the Fixed deposits are
1. capital risk – It is perceived that the capital is safe if invested in Banks
2. Reinvestment risk. The risk of your renewed deposits earning lower returns when the interest rates come down.
That is precisely the scenario now.
Above all ,if you are an IT assessee , you pay income tax.
IN case you get 9% interest and you are in the higher bracket of 30%, your post tax returns will be 6.3%
The irony is that even if you have a cumulative deposit and not withdrawing interest, you are liable to pay the tax on the interest you accumulate in a financial year.
I share with you an option, especially for investors, who normally keep investments in Fixed deposits and renew year after year. Let us assume the investor, at the least renews for 3 to 5 years.
One can consider investing in debt fund, and this fund is known as Monthly Income Plan or MIP in short.
I have analysed a fund, by name Franklin INdia MIP for the last 9 years and the returns of these funds are tabulated below for your understanding. The returns vary depending on the performance of the market and from the table below you will see no year, more than one year the fund has given a negative return.
Please note that the investments are invested 80% in debt instruments and 20% in equity. But as one can see in the table, the returns are positive an fluctuate with market The longer the duration, the fluctuations are normalised to get a better post tax returns.
If you had renewed for 9 years, and had invested 1 lac, you would have got 2.16 lacs with an annual return of 12.99% post tax, which is almost double the fixed deposit return.
Now the most interesting aspect is that the tax you would have paid on the interest you earned of 1.16 lacs is hardly 3 k and that too after 9 years.
This is because indexation benefits are available.
So if you are the one or any one known to you is reinvesting in FDs and worried about the falling interest rate scenario, you can consider this option or similar options.
|9 years||5 years||3|
|amount invested in 2006||100000|
|cost of inflation index||1.973025048|
|fund value today||216621.5946|
|tax @ 20%||3863.817947|
|post tax return||112757.7766|
|annual absolute return||12.50%|
Please do contact me for any further clarifications are interest.