What is the best way to invest 1 Lakh rupees a mutual fund or a fixed deposit |
Posted: April 17, 2018 |
Whether it is to fulfill short-term goals or perhaps you want to save it for retirement, investment demands a lot of thinking and consideration. This is because there are several investment avenues with different features and benefits. While one may offer you reasonable risk-free investment, the other might be good at capital appreciation. Hence, it solely depends on you to choose the wisest investment option that equally suits your needs and purpose of saving. Now with no further delays, read on to know all important details about the two biggest investment avenues: a mutual fund or a fixed deposit. Fixed Deposit A Fixed Deposit or FD what it is commonly called have been swaying investors since ages. Being a financial instrument provided by Indian banks, an FD scheme never fails to impress people with its amazing feature and benefits that include: 1. Higher interest rate than a regular savings account 2. FDs come with a pre-defined maturity period that can be set by the investor 3. FDs are one of the safest investment options that offer guaranteed returns as well 4. It is a risk-free investment method and has no cost of investment Mutual Fund A mutual fund is a recently burgeoned investment alternative that is subjected to market risk but may get you higher returns if you choose a longer investment term. Also, different mutual fund products have different risks associated with each one of them. For example, debt mutual funds are low-risk funds. Alternatively, medium-risk funds such as hybrid mutual funds including both equity and debt can yield better returns than low-risk funds. But the risk here is more than low-risk funds. The perfect example of medium risk funds is equity savings funds and monthly income plans. In addition, there are also high-risk funds where one can invest in. Here the loss of capital is highest in short-term investment but in the long run, these high-risk funds are sure to provide highest returns. Investors looking for a long-term investment with higher capital appreciation must invest in this high-risk mutual fund options. Equity mutual funds come under this risk grade. While the rate of interest offered in a fixed deposit is fixed throughout the investment terms, the interest rate on MF investments tends to change as per the market fluctuations. This means, since mutual funds offer the benefit of market-linked returns, they have the potential to earn high returns in the form of capital appreciation during positive market conditions. However, the returns on a fixed deposit will remain same notwithstanding the fact that the market is ripe or emergent. So it can be stated that mutual funds subjugate fixed deposits during favorable market conditions, and intensify fixed deposits during unfavorable market conditions. The table below highlights other key factors that differentiate fixed deposits with mutual funds
So now let’s suppose you want to invest 1 Lakh in a bank fixed deposit, debt mutual fund, and equity mutual fund. In one year, all three investments will give you a return of 9%. However further assuming that the inflation grows to 7.5% in the same year, your 1 Lakh invested now will become 1.09 Lakh in all three investment alternatives. However in case of fixed deposits wherein the income earned is taxable as per the current tax slab, the gain of Rs. 9000/- will be further reduced to Rs. 6300/- as per the highest tax slab of 30%. So the interest earned in FD would be 6.3% in a given year. Now moving on to debt mutual funds, here the indexation benefit is available on account due to the long-term investment gain, (since the amount has been invested for one year). The investment cost in MFs is increased to Rs. 1, 07,500/- (due to inflation) instead of Rs. 1 Lakh. So bearing in mind the indexed cost, the taxable gain would be Rs. 1,500/- instead of the original gain of Rs. 9,000/-. Here the investor pays long-term capital gain tax @ 20% (as he has claimed indexation benefit) and hence the post-tax returns (over a period of 1 year) would be 8.7%, which is higher than the bank fixed deposit. The long-term capital gain from equity mutual fund is fully exempted from tax and thus proves to be the most lucrative investment alternative of all the investment avenues discussed above.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|