Fixed Match Tilting Againfst FDs_business Week Sept 11_doc

8/12/2019 Fixed Match Tilting Againfst FDs_business Week Sept 11_doc

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Fixed Match Tilting Against FDsDipak Mondal Delhi Edition: September 2011

With interest rates on bank fixed deposits (FDs) touching 9-9.5 per cent, are you in a fix hether to allocate a part of your in!estiblesurplus to the inco"e fund your financial planner has ad!ised or are you instead te"pted to park your "oney "eant for fixedinco"e in!est"ent in bank FDs#

$n the current scenario, "ost risk-a!erse in!estors ould opt for FDs. %he lure of near double-digit annual returns ith al"ost no riskis too hard to resist gi!en that the a!erage return gi!en by the top 5& inco"e funds in the past one year has been 'ust per cent.

$nco"e funds are debt funds offered by mutual funds that seek current inco"e rather than gro th of capital. %hey in!est in stocksand bonds that pay high di!idend and interest.

$f you ha!e based your in!est"ent decision on the abo!e pre"ise, you "ay ha!e erred not on one but t o counts. First, you areco"paring present FD rates ith the past one year s perfor"ance of debt funds. $deally, you should co"pare debt fund returns ithFD rates a year ago. *econd, the returns co"pared abo!e are pre-tax, hich "ay gi!e you a co"pletely rong picture.

*rikanth +eenakshi, director, Wealth $ndia Financial *er!ices, says often in!estorsco""it the "istake of co"paring current FD rates ith the past perfor"ance of debtfunds.

$deally, debt fund returns should be co"pared to FD rates pre!ailing at the start of theperiod of co"parison, he adds.

For exa"ple, if you are co"paring the past one year s perfor"ance of a debt fund, thatis, fro" uly &/& to une &//, you should co"pare it ith FD rates pre!ailing arounduly &/& and not the current rates.

0et us see ho it orks in reality. 1round uly last year, bank FD rates ere 2-2.5 per cent co"pared to the a!erage one-year pre-tax return of 5.35 per cent as on uly 4, &//, fro" inco"e funds. $f you had in!ested in a one-year FD around that ti"e ( uly &/&),your pre-tax return ould ha!e been 2-2.5 per cent and not 9-9.5 per cent, as the FD rates stand no . %he top 5& inco"e fundsga!e a return of 2.5 per cent and abo!e during the period ( uly 5, &/& to uly 4, &//).

Mutual Funds turn to debt schemes to tackle high interest rates

Fixed "aturity plans (F+ s), hich are close-ended debt funds, ga!e an a!erage return of 5.5 per cent during the uly &/&- une&// period. F+ s are touted by fund houses as good alternati!es to FDs because they are "ore tax efficient and carry a lo errisk.

While e co"pared the a!erage return of debt funds ith that of FDs, there are debt funds hich ha!e seen double-digitappreciation in their net asset !alue on an annualised basis, gi!ing higher pre-tax return than bank FDs.

1"ong inco"e funds, 6scorts $nco"e Fund-7ro th ga!e a return of /2 per cent, 8eligare redit :pportunities /;.5 per cent,

*undara" *elect Debt-*%1 /;.4 per cent and %ata F$ F ;-8egular / per cent in the one-year period "entioned abo!e. 1"ong F+ s, $ $ $ rudential *.+.1.8.%-*eries < ga!e a return of /3 per cent and $ $ $ ru*.+.1.8.%-*eries F ga!e a return of /4.3 per cent during the sa"e period.

TA !M"#!$AT!%&S

1fter ad'usting for inco"e tax, returns fro" debt funds ould be better than those fro" bankFDs. =ut before e go into the post-tax returns, e ould like to discuss the rules related totax liabilities on debt funds.

M'ST (EAD > Debt mutual funds or FDs)

*$onsidering the o+erall impact on realreturns due to inde,ation benefit- a

debt fund is definitel. a better alternati+e to FDs/* adnesh $ha+an

Fund "anager, fixed inco"e, +irae 1sset7lobal $n!est"ent

$omparing present FD rates iththe past performance of debtfunds is a common mistakecommitted b. retail in+estors/

8/12/2019 Fixed Match Tilting Againfst FDs_business Week Sept 11_doc

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$n a debt fund, the long-ter" capital gains tax (earnings fro" a fund held for one year and abo!e) ithout indexation is /& per cent,hile it is & per cent ith indexation. *hort-ter" capital gains tax is deducted according to your inco"e tax slab.

$n indexation, the cost of in!est"ent is raised to account for inflation for the period the in!est"ent is held. %his is done by using acost inflation index nu"ber released by the central tax authorities e!ery year.

Di!idend inco"e fro" debt funds other than li?uid funds is taxed at / .5 per cent, hile that fro" li?uid funds is taxed at 5 per cent.

<o e!er, the interest earned on FDs is added to the total inco"e of a person and then taxed according to his tax slab. 1lso, if thetotal interest earned on all your FDs in a bank is higher than 8s /&,&&& in a financial year, the bank ill deduct tax at source (Seetable Tax Outgo) .

%he indexation benefit table clearly sho s that despite FD rates being higher than the returns fro" debt funds, post-tax gains arehigher in case of debt funds.

onsidering that the o!erall i"pact on real return due to the indexation benefit i s significant, a debt fund is definitely a betteralternati!e to fixed deposits in the long ter", says @adnesh ha!an, fund "anager, fixed inco"e, +irae 1sset 7lobal $n!est"entsri!ate.

$n!estors ho pay &-;& per cent tax on their earnings stand to gain "ore fro" tax-efficient debt funds than those in the /& per centtax bracket, hich is e!ident fro" the indexation benefit table.