R Murali, 38, of Bengaluru closed the fixed deposit account he had in a public sector bank and moved the money to a public provident fund account. A media professional, Murali shifted the money from the bank because it was offering low interest rates, and opening a PPF account meant he would get income tax benefits.
For the past two years, the interest rates on FDs have dropped to 5 to 6 per cent from 10 per cent. “Fixed deposits provide limited returns. They are more of a savings product than an investment product because after tax, the real return from fixed deposits tend to be lower than inflation at most times,” says Ajit Narasimhan, category head, savings and investments, BankBazaar.com. “Having seen better returns earlier, even if they are from FDs, it is natural for people to gravitate towards other instruments that provide higher returns.”
Experts say that before investing, one should work out an investment plan that could beat inflation. The best way to do it is by investing in mutual funds and equity. Mutual funds are capable of beating inflation and providing good returns. When chosen carefully, diversified investments in balanced mutual funds would be safe and it would provide investors with much higher returns. Mutual funds are versatile and there are funds suitable for both risk-taker and risk-averse investors. Even for a highly risk-averse investor, there are debt mutual funds that provide higher returns as compared to Fds.
Ajit Narasimhan, category head, savings and investments, BankBazaar.com
“FDs are not a hedge against inflation,” says Narasimhan. “Premature withdrawals may end up with lower returns, and in worst cases, a penalty as well. The interest earned on the FD is fully taxable. If the interest is more than Rs 10,000, a TDS [tax deducted at source] of 10.3 per cent would be deducted on the amount. However, that is not the end of your tax liability. If you are in the higher income bracket, you will have to pay more tax on the income. Therefore, it is not surprising that people are looking at other options that provide a hedge against inflation and are tax efficient.”
Narasimhan strongly recommends mutual funds as an avenue that every investor must consider. Earlier, people were not aware of the various investment products available. “Even if they had information, their investment strategy was often hampered by the complexities involved in deciphering the nature of these investment options,” says Narasimhan. “It made them reluctant to invest in something that they do not fully comprehend. That is no longer the case today. The amount of information put up by financial companies and investment houses online is enabling people to find answers to their questions. Moreover, with a lot more analysis available today, and much of it automated in the form of robo-advisory, people are more confident about making the right choices.”
Dinesh Rohira, founder and chief executive officer, 5nance.com
For instance, when an investor visits BankBazaar to pick mutual funds, all he needs to do is answer a few basic questions and the robo engine would suggest the best options available for him. The robo adviser has complex algorithms to filter the various financial products and curate suitable products for the customers.
Thanks to all the information available online, people are no longer wary of investing in new products. “The shift in practice could be attributed to fixed deposits losing its gleam in the current setup. A declining interest rate on fixed deposits coupled with educational programme on investment have directed investors on a lookout for better investment alternatives,” says Dinesh Rohira, founder and chief executive officer, 5nance.com.
Rohira suggests debt mutual funds that offer higher liquidity, better fund management and increased inflation adjusted returns as an alternative to fixed deposits. “Keeping the risk factor at par and considering the time horizon of investment, an investor has an alternative to park the cash in equity mutual fund,” he says. “The diversified characteristic of such a fund confines the risk factor with a potential of higher return. For example, large-cap equity funds, on an average, have delivered 15.93 per cent returns in the past three years. In the current scenario where interest rates remain truncated, and with the change in perception of investors towards traditional investments, it should be considered as a shift into a new investment arena.”
