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Finance

FDs are destroying your wealth

If you are still making FDs of your monthly savings, you are destroying your wealth.

Interest on FDs is taxable. That means the current interest rate of about 5.5% effectively gives you ~3.8% return on your money (Assuming you fall in the highest income tax slab).

With more than 6% inflation, your money is losing its value.

DEBT Mutual Funds is a better alternative which is tax efficient, gives better returns and is quite safe.

Debt Mutual Funds are different than EQUITY Mutual Funds because they lend your money to government & companies rather than investing it in the stock market.

A good Debt Mutual Fund can give you better returns than FDs, depending on the fund’s category.

A few benefits are-

  • Mutual Funds in India are very tightly regulated, so your money is as safe as it was in the bank.

  • You will be taxed only if you withdraw the money. So, if you do not withdraw the money, you will have to pay ZERO taxes on the return.

  • If you withdraw money after 3 or more years, you get indexation benefit which further reduces income tax to an effective rate of 6-7%.

  • SEBI has defined different categories for Debt Mutual Funds based on the duration of loans and the type of companies to which loans are given.

That means for safer investment, you can go for the funds with shortest duration or those that give loans only to the reputed companies.

  • There is no penalty for withdrawing money early, unlike FDs where you pay penalty if you withdraw the money before completing the term.

  • Debt Mutual Funds are highly liquid & you can withdraw your money in minutes. So, you can avoid keeping large sums of money in the savings account.

So, it seems like a good time to move your money from FDs to Debt Mutual Funds.

By Abhineet Mittal

Abhineet is IIM Alumnus and Founder of popular Digital Publishing Platform, Sahityapedia. He is a technology enthusiast by hobby & an avid reader.

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