Merely keeping money in bank accounts might not yield the best results for your clients. A higher inflation rate means that things most likely will be more expensive in the future. Thus, relying on bank savings might leave your clients a step or two behind. You can suggest them to invest their money in lucrative avenues so that they can not only beat inflation but also build a healthy corpus.
When it comes to investments in India, Fixed deposits or FDs have been an age old and consistent mode of investment.
How FDs are popular and their benefits?
FDs have been around for a long time now and it hasn’t lost any of its demand. They have been popular for a couple of very good reasons. Primarily, investors have the perception that FDs are safe when compared to other modes. It is because banks rarely go bankrupt. However, of late, banks are seeing rising losses which are hampering their profits. As such, fixed deposits cannot be assumed to be completely safe.
Before investing in a fixed deposit, investors are aware of their potential returns, since it offers guaranteed returns. Secondly, investing in five year fixed deposits give you tax benefits too. The investments are treated as a tax-free deduction and you can claim a deduction of up to INR 1.5 lakhs thereby lowering your tax liability. Thus, fixed deposits lure investors with these benefits that they provide.
The Drawbacks of FDs
Irrespective of their popularity, FDs have quite a few demerits too. You should know them before investing in fixed deposits. Here are some of the major ones.
- Section 80TTA allows for tax deductions up to INR 10,000 for a fiscal year for the interests earned. However, it is not applicable to fixed deposits. In other words, clients are liable to pay taxes on the interests that they earn on their fixed deposits.
- The returns of FDs have been more or less similar. In the 1970s the interest rates were around 7.5% and currently, most banks offer interest rates up to 8% on the higher end. However, in the past 40 years, inflation has seen a big jump from 6% to about 10%. Thus, the returns on a fixed deposit will not hold good when it comes to inflation.
- FDs aren’t very liquid as well. If there were a need for some money, clients will have to break their FD which attracts lower interest rates along with fines.
- Banks usually offer security in the form of insurance on fixed deposits of up to INR 1 lakh. Anything beyond that is subject to risk of defaulting by the bank.
- Only five year fixed deposits give you tax benefits. If you invest in any other deposit scheme, the investments would be taxable in your hands as they would form a part of your taxable income.
The alternative – Debt mutual funds
Another alternative to investing in fixed deposits is debt mutual fund. In terms of the risks involved, a debt mutual fund is the closest to a fixed deposit as the fund invests in fixed income instruments. Thus, debt funds have low risks just like fixed deposits. Moreover, the rate of interest on debt mutual funds is much better as compared to FDs.
You can also choose close-ended FMPs(Fixed Maturity Plan) wherein you get the benefit of debt mutual fund with the basic interest guarantee of fixed deposits as well.
The advantages of Debt MF:
A debt mutual fund has several tricks up its sleeves that investors with a low-risk appetite will find attractive. Here are some of the major advantages.
- One of the biggest advantages of a debt mutual fund over FD is the liquidity. Clients have the option to withdraw or redeem their units as and when needed without having to worry about lower rates or paying any fines.
- The returns of debt mutual funds are inflation adjusted since the funds invest in market linked securities. As such, the growth of the fund is in tandem with the growth of the capital market. Your clients, therefore, get inflation adjusted returns which give them a suitable corpus for future.
- Debt funds usually give better returns compared to bank FDs.
- If the client redeems his debt funds after 36 months of investment, they get a tax benefit. Tax on the profit earned from debt funds is 20% with indexation benefit. This helps in saving tax even when your client is in a higher tax bracket.
Conclusion
While FDs have been a household name for ages, investing in a modern tool like debt mutual fund is a much better option for your clients. Your customers can get indexation benefit if they remain invested for a longer period. The returns offered by debt mutual funds are better while those offered by fixed deposits are decreasing. Moreover, your customers can easily redeem their debt fund investments while FDs are rigid. Thus, with better liquidity, better returns and similar risks, debt mutual funds are a better bet than FDs.
You can suggest Debt funds to your clients using TurtlemintPro app.
