1. Equity funds, Bank FDs and Debt funds are unrelated products.
2. They play different roles in an investment portfolio, and comparing only their returns per se would be myopic during asset allocation.
3. An investor is investing in:-
a) Equity funds for market-determined growth and returns through corporate equity shares,
b) Bank FDs for unrealistically frozen rupee returns through govt.-determined products,
c) Debt funds for market-determined interest rates and returns through debt products.
4. For his Debt portfolio, an investor inevitably compares returns of Bank FDs and Debt funds, for which he should keep the following in mind:-
a) Capital protection is more in Bank FDs.
b) Bank interest is taxed at slab rate (citizens/senior citizens can avail Sec 80TTA/B rebate upto 10/50,000 limit).
c) Capital gains in Debt funds are taxable at slab rate below 3 years, and at 20% after inflation indexation benefits above 3 years.
d) 5-yr+ tax-saver Bank FDs are eligible for Sec 80C benefits within overall 1.5 lakh limit.
5. Having said that, a 5-yr+ Long-term Debt fund scores over a 5-yr+ Bank FD because:-
a) The longer a Debt fund's duration, the bigger is the indexation benefit, and thus attracts a lower tax rate, except when an investor is in lowest tax bracket.
b) There is no TDS in Debt funds, so no need to submit Form 15H or 15G like in FDs.
c) Taxation in a Debt fund is deferred indefinitely till the investor redeems his units, while interest income from FDs is taxed annually even with 5+ years maturity.
d) Capital gains from a Debt fund can be set off against Short-term and Long-term capital losses in other investments.
e) Debt funds are also more liquid, for withdrawal any time, and partial withdrawals without breaking entire investment.
f) In an open-ended Long-term Debt fund, there are no maturity hassles or reinvestment losses at prevailing interest rates, with growth potential intact always.
g) Small amounts can be invested, lumpsum or SIPs, in the same fund, and SWPs can enable withdrawal of pre-determined monthly needs.
h) An investor can also STP his money seamlessly from a Debt fund to an Equity fund of same fund house, and vice versa, to rebalance his fund portfolio.
i) There is no penalty if any SIP, SWP or STP gets missed at any time due to insufficient money in any fund.
2. They play different roles in an investment portfolio, and comparing only their returns per se would be myopic during asset allocation.
3. An investor is investing in:-
a) Equity funds for market-determined growth and returns through corporate equity shares,
b) Bank FDs for unrealistically frozen rupee returns through govt.-determined products,
c) Debt funds for market-determined interest rates and returns through debt products.
4. For his Debt portfolio, an investor inevitably compares returns of Bank FDs and Debt funds, for which he should keep the following in mind:-
a) Capital protection is more in Bank FDs.
b) Bank interest is taxed at slab rate (citizens/senior citizens can avail Sec 80TTA/B rebate upto 10/50,000 limit).
c) Capital gains in Debt funds are taxable at slab rate below 3 years, and at 20% after inflation indexation benefits above 3 years.
d) 5-yr+ tax-saver Bank FDs are eligible for Sec 80C benefits within overall 1.5 lakh limit.
5. Having said that, a 5-yr+ Long-term Debt fund scores over a 5-yr+ Bank FD because:-
a) The longer a Debt fund's duration, the bigger is the indexation benefit, and thus attracts a lower tax rate, except when an investor is in lowest tax bracket.
b) There is no TDS in Debt funds, so no need to submit Form 15H or 15G like in FDs.
c) Taxation in a Debt fund is deferred indefinitely till the investor redeems his units, while interest income from FDs is taxed annually even with 5+ years maturity.
d) Capital gains from a Debt fund can be set off against Short-term and Long-term capital losses in other investments.
e) Debt funds are also more liquid, for withdrawal any time, and partial withdrawals without breaking entire investment.
f) In an open-ended Long-term Debt fund, there are no maturity hassles or reinvestment losses at prevailing interest rates, with growth potential intact always.
g) Small amounts can be invested, lumpsum or SIPs, in the same fund, and SWPs can enable withdrawal of pre-determined monthly needs.
h) An investor can also STP his money seamlessly from a Debt fund to an Equity fund of same fund house, and vice versa, to rebalance his fund portfolio.
i) There is no penalty if any SIP, SWP or STP gets missed at any time due to insufficient money in any fund.