If you were thinking of saving
up money for the medium term, say 3 years or more and allow you to invest small
a fixed sum on a monthly basis, recurring deposits (RD) of banks would be the
one on top of your mind. Of course, in RD there is no risk and its return is
granted. But, if you had a minimum of 7-10 years investment time frame and
intend to invest small sums regularly, it may not be so lucrative option as last decade average inflation was at 6.5 per cent and it
effectively meant that the returns fail to beat the inflation and moreover, its
interest is very much taxable could be proved an unattractive option. But
here’s a good substitute that not only generates better returns over the long
term but is far more tax efficient.
Also Read :Take small steps. But make a start!
Also Read :Take small steps. But make a start!
SIP or Systematic Investment
Plan is a very popular mode of investing, mostly monthly or quarterly, of a particular amount in a mutual
fund scheme like bank recurring deposits (RD). To put it simply, SIP
your money is invested in mutual funds (indirectly in equity) and in recurring deposit though the
rate and tenure of investment is fixed but the return is very small as compared
to the SIP.
Short-Term Goals
Investments
in recurring deposits can only help one achieve short-term financial goals,
especially when the money is needed within three to five years. No doubt, if
one deposits Rs 5,000 per month in a recurring deposit for five years that
yields 9.25 per cent interest, he will get Rs3,81,817 at the end of the
maturity can easily achieve his short-term goal like small car etc.
However,
it has to be kept in mind that although one can be sure of the maturity value
of a recurring deposit, he/she needs to factor in post-tax returns also.
Though, the interest income from an RD account exceeds Rs 10,000 in a given
financial year, it will not attract any TDS, the onus of paying taxes is on the
investor, as the interest earned is taxable at the applicable income tax slab
for each individual.
Long-duration Goals
Since,
RD is not the best to use to meet long term goals such as education or marriage
expenses and final goal of retirement corpus, it would be better to opt for
SIPs in some good equity mutual funds. In the long run, Systematic investment
plan or SIP of mutual funds pretty much work like an RD. Every month on a
specific date you should invest a fixed amount into an MF scheme. You can
choose to invest as much as low as Rs500 a month. The funds get invested as per
the objective of the scheme you’ve chosen. It could be a debt, equity or debt-equity
heavy scheme. SIPs work well for long and medium terms.
Unlike
RD you won’t get a fixed rate of return on your SIP investments. While market
volatility may impact short-term return, cost averaging helps one earn better
return over a long period of time. Under systematic investment plan, one
optimizes the returns rather than maximizing them. In case of SIPs in equity
funds, there will be no long-term capital gain tax if units are sold after one
year from the date of investment. From return as well as tax perspective, it
pays well to stay invested in equities for longer duration.
Balance in Portfolio
Since
the both instruments belong to different asset classes, a mix of the same helps
one maintain proper balance. While the equity portion will help boost growth,
the debt portion will ensure necessary stability and assured return. Both
Systematic Investment Plan (SIP) in equity funds and recurring deposits in
banks are used to create a large corpus over a long period of time. The effect
of compounding helps both deliver handsome returns. But, it won’t be fair to
compare the two as they belong to different asset classes, namely equity and debt;
it is like comparing apples with oranges. It should maintain balance of mix of
both to get optimize return and hedge the risk against volatility of market.
Conclusion
If you
are someone who is looking to invest small amount of funds at regular intervals
and eventually gathers a larger corpus, should be made based on your investment
horizon, risk appetite and structure of the portfolio. Hence, the choice
between SIP in equity funds and recurring deposits would depend upon your
financial targets. But, RD is a good
starting point for young investors who have just started out and want assured returns.
Liquidity, tax efficiency
and superior returns make SIP in equity funds a good supplement to RDs. If you
are simply a RD investor, take a third of your monthly surplus kept aside for
RD and start an SIP in equity fund. That way you will have a good mix of a
guaranteed fixed return product like RD and at the same time, a better yielding
product called equity funds.
No comments:
Post a Comment