Beyond FDs

Let’s introduce you to three individuals with the same amount of investment surplus {}, but different investment philosophies. All three of them have savings of Rs. 10 Lakhs and a monthly surplus of around 50,000 per month. So the total money to be invested for all three, over a span of 10 years is ₹ 17,00,000.

Presenting- FD-Rahul. MF-Geeta. Bond-JamesBond.

FD-Rahul is old school. He believes that money is safest in fixed deposits. He shuns any talk of a mutual fund or the stock market as gimmicks, gambling or just simply – too risky. The bank pays FD-Rahul interest at 7% on his fixed deposits (i.e. the average rate over 10 years), and he pays 30% tax on the same. He gets a new FD made every month of the amount he saves after spending on his needs.
The value of his investments (after tax, assuming a 30% tax rate) over a span of 10 years is = ₹91,55,724.06

Bond-JamesBond is a savvy tax lawyer who understands that his after-tax return on money kept in a fixed deposit is only 4.9% (at 30% tax rate). But he finds equities too risky for his taste. So he has instructed his broker to buy tax free bonds giving a yield at a above 6.5% whenever they are available. Assuming that throughout the 10 years tax free bonds are available at 6.5% whenever he has money to invest (an optimistic assumption with regard to availability).
The value of his investments over a span of 10 years is = ₹1,00,17,647.86

MF-Geeta is a commerce graduate who works at a bank. She understands financial products, their respective risks, and the returns they tend to give. She has invested her savings of 10 Lakhs in a Debt Mutual Fund, and invests 50,000 every month in Equity Mutual Funds through a Systematic Investment Plan.
The value of her investments (after tax, at prevalent tax rates considering indexation) over a span of 10 years is = ₹1,20,94,958.89

Now, there’s nothing wrong in being okay with an FD return if that’s what floats your boat. But the purpose of this post is to encourage you to learn about the “other” places to park your money, and at the same time show you what (for the most part) makes the rich richer and the poor poorer. The rich have access to more sophisticated financial products, the risks and rewards of which they take the time to understand. And mutual funds are a great place to start.

Sure, when one invests in market related products, (say a mutual fund) – there is volatility along the way, and there are days when exiting from your investments means making less than targeted profits, and in some cases, even a loss. But if the investor has a broad understanding of what they’re buying, and investment plan is stable, mutual funds in the long haul offer a better return than most other financial products.

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