Worried about the falling interest rate scenario? What do you do with your FDs

Hi

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.
year 1 2 3 4 5 6 7 8 9 10
2015 43.255
2014 7.833 35.422
2013 3.062 10.895 32.36
2012 2.922 5.984 13.817 29.438
2011 1.982 4.904 7.966 15.799 27.456
2010 0.791 2.773 5.695 8.757 16.59 26.665
2009 4.536 5.327 7.309 10.231 13.293 21.126 22.129
2008 -0.937 3.599 4.39 6.372 9.294 12.356 20.189 23.066
2007 2.608 1.671 6.207 6.998 8.98 11.902 14.964 22.797 20.458
2006 0.49 3.098 2.161 6.697 7.488 9.47 12.392 15.454 23.287 19.968
2015 43.255
2014 22.11% 35.422
2013 9.46% 33.67% 32.36
2012 9.93% 20.33% 46.94% 29.438
2011 7.22% 17.86% 29.01% 57.54% 27.456
2010 2.97% 10.40% 21.36% 32.84% 62.22% 26.665
2009 20.50% 24.07% 33.03% 46.23% 60.07% 95.47% 22.129
2008 -4.06% 15.60% 19.03% 27.63% 40.29% 53.57% 87.53% 23.066
2007 12.75% 8.17% 30.34% 34.21% 43.89% 58.18% 73.14% 111.43% 20.458
2006 2.45% 15.51% 10.82% 33.54% 37.50% 47.43% 62.06% 77.39% 116.62% 19.968
12.96%
INFLATION INDEX 519 551 582 632 711 785 852 939 1024
9 years 5 years 3
min 37.5% 10.82
max 62.2% 46.94
amount invested in 2006 100000
cost of inflation index 1.973025048
investment cost 197302.5048
fund value today 216621.5946
profit 19319.08973
tax @ 20% 3863.817947
post tax return 112757.7766
annual absolute return 12.50%
Please do contact me for any further clarifications are interest.
varadharajan
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