It was till yester-years that interest rates in the economy were regulated by the government and hence investors were able to rake in higher rate of interest enough to beat inflation but as the economy has now become more de-regulated, the charm of conservative investment instruments has faded ever since.
So, considering the sole purpose of investments as both RD and mutual funds set in some discipline in the investment pattern, here are discussed what should be your choice now.
1. Risk profile should decide you likely bet: As with other investments: Like other asset classes, you shall take a dig in either of the investments on the basis of your risk profile. If you are one of those who can afford no capital destruction, do go in for the RD schemes as these allow you to park some fixed sum on a month on month basis over the pre-decided term. And mutual funds, both debt as well as equity due to market based returns are exposed to some risk and hence should be given this dimension a look.
2. Return: Over the years, the rate of return on RD schemes has taken a hit due to RBIs monetary policy stance that looks to curb liquidity in the system so as to stabilize the financial system. So, while a highest fetching RD as in the case of Nainital Bank can earn you 7.9%, investment in debt or equity funds can earn you even higher. With this return you are best able to beat inflation and hence mutual fund investment provides better risk-return trade off.
The average returns generated by diversified equity mutual funds in last 5 years are around 18% CAGR.
3. Post tax returns are better in case of mutual fund SIP: In case of RDs, similar to FDs, in case the interest amount for the given financial year exceeds Rs. 10000 then it attracts TDS. Also, the income is added to the income from other sources when filing return of income and taxed as per the slab rate of the individual.
However, the taxation of mutual fund returns are far more tax-efficient, as long term capital gains now accrue if the investment in equity mutual fund is redeemed after a period of 1 year @ 10% while the short term capital gain @ 15% is taxed.
In case the returns are increased if you invested for long i.e. more than 3 years than indexation benefit @ 20% is available. But if the holding period is less than 3 years, returns are taxed as per the income tax slab of the investor concerned.
So, considering the given financial landscape, where earning each and every penny is so difficult, you need to even deploy your funds in a manner diligently such that no only you earn handful returns on them but are also able to meet out your long term financial goals. And SIP in mutual funds with all the benefits such as rupee cost averaging and compounding has the power to yield you substantial return provided you stay invested through the tenure. And even in case you face some exigency, it is best to not redeem the investment and instead pause your investment for a time being.