Mutual Funds - A Favourable Tax-Efficient Investment Option

Written on Saturday, May 6, 2017
By Viswajeet Parashar, Sr V.P & Group Head - Marketing

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Fixed deposit has always been one of the safest and favorable investment options for many. But, post demonetization, bank have started cutting the interest rates on fixed deposits, all thanks to the huge inflow of cash into the banks. The decrease in FD interest rates has given rise to a question - Should we be investing in Fixed Deposits?

 

There is no absolute answer to this question since investment is always a personal choice. But before investing anywhere, it is important for an investor to analyze the interest income from that investment. 

 

Getting back to fixed deposits, currently, it is, in general, offering 6% to 7% return rate of interest.  Fixed Deposits have a lock-in period of 5 years and the interest income after five years is taxable as per the relevant tax slab. Now, if you do the calculation, then you will see that the tax adjustment considerably eats up the returns earned. Above this, there is inflation adjustment as well that further reduces the return benefits. 

 

So, if FD interest income is not that tax-friendly, then what are your other tax efficient investment options?

 

Here, you can consider Mutual funds as your investment option. According to a report in http://www.zeebiz.com "To give you better returns, tax saving options, Mutual Funds come in competition with FDs. Mutual Funds are divided based on the asset class, and one of the safest options is Debt Fund. Debt Funds are the funds that invest in debt instruments e.g. company debentures, government bonds, and other fixed-income assets. They are considered safe investments and provide fixed returns." 

 

How are Debt Mutual Funds Tax Friendly?

 

During the first year of investment, just like FDs, even Debt Mutual Funds attract the same rate of tax. But between the first year and third year, Debt Mutual Fund is taxed at a lower rate than FDs, and from 3rd year onwards debt funds become tax-free. This makes debt mutual funds a tax-effecient investment option.  

 

Statistics- Mutual Funds Becoming a Favorable Option for Many

 

The last financial year saw a very good growth in mutual fund investments. "The asset under management of domestic mutual fund industry rose for the fifth straight year by 35% year-on-year, or Rs 4.8 lakh crore to an all-time high of Rs 18.3 lakh crore in FY17."  http://www.zeebiz.com.

 

A report by ICRA has reported that the on assets under management have also registered a quarter-on-quarter growth of 8% in the March quarter.

 

Statistics shared by AMFI reports that the total assets under management for March 2017 is 17.55 lakh crore rupees. In March 2012, it was just 5.87 lakh crore, so the growth is more than triple. 

 

These statistics clearly show that investors have started showing trust on mutual funds and for many, mutual funds have become a favorable investment option for long-term wealth creation in a tax-efficient manner.

 

Conclusion

 

Apart from being tax-efficient, mutual funds are preferred because it is easy to start the investment.  One can start investing with the fund as little Rs. 500. Another advantage is its liquidity, because of which you can enter or exit a mutual fund investment with 'no' or 'minimal' exit load ranging for a period of 3 months to 3 years. (except ELSS funds).  Also, these funds are managed by professional fund managers and the performance tracking of these funds is a matter of public record. So, there is complete transparency. All these combines to make the mutual fund a great investment option.

 

Image Source: http://www.businesstoday.in

 

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