5 Strong Reasons Why Having FD In Your Investment Portfolio Is Good
A vast majority of investors prefer to park their funds in a fixed deposits, and rightly so, fixed deposits have successfully catered to the financial needs of an entire generation
Investing is all about our needs, wants and goals. The vast financial choices that we are flooded with make personal finance quite intimidating. Even now, a vast majority of investors prefer to park their funds in a fixed deposits, and rightly so, fixed deposits have successfully catered to the financial needs of an entire generation. Besides the interest rates are on the rise and it makes sense to invest in a fixed deposit. This article takes a look at the pros and cons of investing in fixed deposits. Here are five reasons to invest in a fixed deposit:
Fixed deposits are considered one of the safest investment options when compared to stocks or other market-linked instruments. It is considered to be an extremely low volatility product. A fixed deposit offers you risk-arbitrage and provides you with a sum assured on maturity. This is a great way to ensure that your capital is safe.
Power of compounding
If one starts early then one can harness the power of compounding. Fixed deposits come in a variety of tenure, from six months to five years. Cumulative fixed deposits are known as money multiplier schemes since the interest is re-invested and interest continues to accumulate on interest as well. For those who need, regular income, non-cumulative fixed deposits are an ideal option.
Fixed deposits are ideal to park money for short-term goals. The primary goal of a fixed deposit is the protection of the capital while generating some interest on it. Whether you are planning a vacation or saving for the purchase of a dream car, a fixed deposit ensures the safety of your money.
With the payment of a modest penalty, one can withdraw the fixed deposit as and when he desires. Now a day, banks even offer loans against fixed deposit accounts. Thus, during times of emergency, fixed deposits can serve as a cushion for your financial needs. An investor can borrow up to 90 per cent of the fixed deposit amount during a time of emergency.
While investing in a fixed deposit one can choose the frequency of pay-outs. One can receive monthly, quarterly or yearly interest pay-outs. This is ideal for senior citizens as regular interest pay-outs ensure regular income. Even if the investor does not want to receive regular pay-outs, he does have an estimate of the total amount of corpus he will receive on maturity.
However, the interest received on a fixed deposit is taxable and any income is taxed according to the tax bracket of the investor. Debt funds are considered more tax-efficient at the same time they deliver higher returns than fixed deposits. This is probably the big reason why debt funds are ideal for long-term investor. Let us look at the returns offered by various debt funds.
In the debt fund segment, corporate bond funds have delivered 6.73-7.07 per cent returns in five years. Dynamic bond fund is another category that has delivered superb returns. In a three-year and five-year period, dynamic bond funds have delivered 5.88-8.06 per cent and 5.87-9.47 per cent, respectively. Even Gilt funds that primarily invest in sovereign securities and are considered extremely safe have delivered 6.04 per cent and 7.31 per cent in a three-year and five-year period, respectively. Even if you want to invest for a medium duration, say three years, then medium duration funds have delivered 5.93-9.47 per cent returns in three years.
The biggest advantage of investing in a debt fund is the tax efficiency it possesses. An investor gets an indexation benefit while computing the long-term capital gains (LTCG) which lowers his tax liability. Let us understand this with an example: if you invest INR 10 lakh in a fixed deposit and INR 10 lakh in a debt mutual fund for 10 years, and assuming that both deliver 7 per cent returns annually, the total returns after 10 years come to INR 19.67 lakh. Since you have held the investment for 10 years, your interest income is LTCG, and eligible for indexation benefit on mutual fund investment. Due to the indexation benefit, the taxable returns of debt funds are just INR 1.65 lakh against the fixed deposit's taxable returns of INR 9.67 lakh! This is a huge difference in taxable income.
While fixed deposits may offer guaranteed returns with minimal risk, debt funds allow you to earn higher returns while also being tax-efficient. There is a no-one-size-fits-all solution for investors. For those having a bigger time horizon, it makes sense to invest in debt funds. However, one should consult his financial advisor to understand his risk-tolerance before investing.