Bank Fixed Deposits Alone Won’t Make You Rich

#1: FDs give returns below inflation

The average inflation rate in India for the last 2 years (2012-2014) is 9.76%. Most FDs only give you about 8.5% interest before tax and around 7% after tax. This means, you are effectively losing money every year you invest your money in a FD.

#2: FDs are taxable, which further reduces the net amount you earn

Compared with equity mutual funds, long term returns from which are tax free, FD interest is taxable at your current tax slab. The higher your income, the lower your FD return will be.

See the graph below for FD vs mutual fund comparison.

Return assumptions - FD @ 8.5 %, Debt fund @  9 %, and equity fund @ 15%. Inflation assumed to be 7%.

As you can see, investing in Bank FDs will result in less money than you need to keep up with inflation. Debt mutual funds just about manages to beat inflation and equity mutual funds beat inflation with almost 3 times the inflation adjusted amount.

Mutual funds provide professional management of money, are tightly regulated and have proven their performance over time. Mutual funds are also very tax efficient and a little bit of planning can reduce tax on your mutual fund returns to zero (in case of equity mutual funds) or almost zero (in case of debt mutual funds).

Should I invest in equity or debt mutual fund?

Equity mutual funds are recommended for long term investing (5 years and more ) and debt funds for shorter durations.

Investing in mutual funds is very simple through Right Investment Solutions.

It’s built for people who want an absolutely simple, yet efficient, way to invest in mutual funds without having to worry about how their money is doing.