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GOING FOR FIXED DEPOSITS (FD) : 10 REASONS WHY YOU SHOULD CONVERT FD INTO DEBT MUTUAL FUND

10 REASONS WHY YOU SHOULD CONVERT FIXED DEPOSITS (FD) INTO DEBT MUTUAL FUND


1. No Tax Deducted at Source-

Investments are done to secure one’s future financial situation. But, in the case of the financial crisis, if one has to withdraw from FD, it attracts Tax Deduction at Source (TDS) of approximately 10%. This percentage is irrespective of the tax slab in which the person falls. If one wishes to get the waiver then they have to submit the Form 15G and Form 15H to the bank. Whereas, if withdrawal is to be made from Debt Mutual funds. Then TDS is not deducted and the entire amount received at maturity is tax-free.

2.Tax Benefit of Indexation on maturity amount-

Investment In FD In Debt mutual fund
Invested amount in FY 2011-12 1 Lakh 1 Lakh
Term 5 year 5 year
Rate of Return @ 9% p.a. @ 9% p.a.
Maturity Amount  before tax INR 153862.40 INR 153862.40
Indexation on Invested Amount N/A INR 137707*

(Invested amount X Cost of Inflation Index of 2015-16 / Cost of Inflation Index of 2011-12)

Gain Earned before tax INR 53862.40 INR 16155.4 (Indexed gain)**
Applicable Tax rate As per taxation slab, 30% being highest 20% irrespective of slab on indexed gain
Tax Charged INR 16158.72 INR 3231.08***
Total Maturity after Tax INR 137703.68 INR 150631.32

 

Indexed cost of acquisition = (Actual cost of acquisition * CII of Year of Sale) / CII of year of purchase

*    (100000 * 1081)/ 785 =   137707

**   153862.4 – 137707 = 16155.4

***  (16155.4 * 20) / 100 = 3231.08

 

3.Rating and safety

If you invest in FD then all you have to do is go and invest without the option of choosing between some options which may yield a higher return.  But, in Debt mutual funds, you can choose funds from various types of funds offered by that company. Also, the funds can be chosen keeping in mind the market ratings of respective funds.

However, as far as safety of funds in Fixed Deposits is concerned; it is only up to INR 1 Lakh and rest is dependent on the rating of that bank

Also, safety of these funds is measured by credit rating of the instrument. These ratings are provided by Independent Credit rating agencies (CRAs) like CRISIL, ICRA and CARE after making use of below scale.

ATING DEFINITION CRISIL ICRA CARE
HIGEST SAFETY CRISIL AAA ICRA AAA CARE AAA
HIGH SAFETY CRISIL AA ICRA AA CARE AA
ADEQUATE SAFETY CRISIL A ICRA A CARE A
MODERATE CREDIT RISK CRISIL BBB ICRA BBB CARE BBB
MODERATE DEFAULT RISK CRISIL BB ICRA BB CARE BB
HIGH DEFAULT RISK CRISIL B ICRA B CARE B
VERY HIGH DEFAULT RISK CRISIL C ICRA C CARE C
DEFAULT CRISIL D ICRA D CARE D

4. Higher returns as per the duration of Debt Mutual fund

Debt mutual funds might offer a higher rate of return as compared to Fixed Deposit. As according to your need you can opt for different debt mutual funds which offer higher returns in their duration zone. Let’s say if you are looking for investment for short duration then you can opt for liquid funds comparable to savings account return.

In comparison to FD returns you can opt for higher duration fund starting from 1 year to 10 years.


 

5. FD breaking charges and liquidity-

Bank FDs attract some penalty charges if they will be withdrawn before maturity. But, a debt short term fund does not have any penalties. Though if you have chosen higher duration then you might have to face such charges until 1 year is completed but the god part is that you don’t have to compromise on the rate of return.

 

6. Falling interest rates in Fixed Deposits (FDs)-

Being the developing economy we offer highest interest rates in fixed income among all countries in the world. As you can see the trend from last 2 years RBI is decreasing interest rates continuously and we assume that RBI will also continue to do so.

These falling interest rates will favor higher duration funds. And it can be seen that during the last 2 year they have performed better and have given returns in double digit.

 

7. Flexibility to do SIP, SWP AND STP

Debt mutual funds provide investor more flexibility in investment options as compared to FDs. You must be aware of investment using SIP (Systematic Investment Plan) in equity mutual funds but you can also choose SIP to invest in debt funds which also works like RD (Recurring Deposit) in the bank but here you get far higher returns.

STP is also a good tool as through this you can link your debt mutual fund to any equity fund of your choice of that company. Also, you have an option to transfer every month a fixed amount from one scheme to another scheme.

Along with that SWP (Systematic Withdrawal Plan) is also available where you can set a fix date and amount to withdraw from you debt mutual fund to fulfill your needs on monthly basis

 

8. Dividend transfer-

You can also choose dividend option in debt mutual fund. The frequency of dividend can be daily, monthly, quarterly, half-yearly and yearly in which you get a dividend in form of return and your principal remains the same.

 

9. Track and see your returns daily-

If you invest in Fixed Deposit there is no way to track and see the growth on your principle amount invested. But, in debt mutual fund, you can track the growth of your investment on daily basis. Not even tracking but also redemption is possible. So it is good to see your money growing, whereas in any other instrument it is not so easy.

 

10. Switching facility-

Debt mutual funds provide more liberty in handling the investment as compared to FD. Liberty is in terms of the option being available to switch money from one fund to another fund and switch from debt mutual fund to equity and vice-versa. Also, if you foresee a crisis in the Equity market and would like to enter the market at a lower level then breaking an FD may take time. Whereas in debt mutual fund you can switch your fund immediately at that point and can buy mutual funds immediately.

In case, of any query kindly feel free to contact Mr. Harsh Mahajan from Investment Locker. Contact Number – +(91) 9971155722, E-mail address- harsh@investmentlocker.com.

About Harsh Mahajan

I am a Certified Financial Planner. I am having a decade’s experience. I am now willing to spread the financial knowledge and awareness by way of blogs on different finance related topics under one platform :) Our Financial information is entirely based on market analysis and experiences faced by our clients.

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