Alternative to Fixed Deposits; where you don’t have to pay tax every year💰

Avenues for investments include:

Public Equity (Listed Companies)
Private Equity (Startups, Own business)
Equity and Debt Mutual Funds
Bonds
Fixed Deposits
Government Schemes, etc.

While dealing with my own clients', I see a lot of people who have had very bad experiences in the past. Such experiences include the erosion of capital due to greed or less prudent decisions in public equity markets. These people never return to equities for a lifetime and stick to fixed-income investments.

Retirees primarily invest in fixed income securities, as risk appetite comes down as age increases. One of the avenues for Indians to save and park money has been fixed deposits.

Debt funds are a good alternative to fixed deposits.

Where do Debt Mutual Funds Invest?

Features of Debt Funds and Fixed Deposits?

The best part of debt funds:

In case of fixed deposits, one has to pay tax on the interest every year.

This is not the case with debt funds. Unless and until you sell the debt funds investments, you don't have to pay taxes on the profits.

And the cherry on the cake, the tax rate on profits is flat 20% after indexation (even if you’re in highest tax bracket).

Illustration of investment of INR 100 in fixed deposit and debt funds.
For simplicity; I've

Assumed income tax rate of 30% (highest tax bracket).
Ignored the education cess and surcharges
Ignored the benefit of indexation while calculating taxes

Conclusion:

Debt funds offer a similar pre-tax return as of fixed deposits.
However, due to the postponement of tax on gains in debt funds, they offer very attractive post-tax returns.
Postponement of taxes helps in creating more wealth in the long term.
Considering the speed of defaults in private and co-operative banks nowadays, one should seek more safety than extra returns. That's not worth the good night's sleep. One should stick to more creditworthy institutions and banks.
While investing in fixed income securities, one should always consider:

Consider a balanced allocation to fixed deposits, (well-researched) debt funds and select government schemes.
Evaluate the investments on the basis of post-tax returns and not pre-tax returns.

Sir John Templeton quotes:

Invest for maximum total REAL return. This means the return on invested dollars after taxes and after inflation. Any investment strategy that fails to recognize the insidious effect of taxes and inflation is severly handicapped.

You may contact me in case you need to ask or tell me something. I am waiting to hear from you.

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Stay home! Stay safe!

Thank you very much for your time!

With respect,
Aaditya Chhajed
CA, CFA(US) All Levels Cleared, MCom

E: chhajedaaditya@gmail.com
M: +91-9404055222.

Instagram: https://www.instagram.com/chhajedaaditya/

Aaditya is the founder of Aaditya Chhajed Financial Advisory Services, a Financial Planning and Wealth Management Firm in Pune.

He loves helping family, friends, and, clients make better financial decisions. He believes learning is perpetual.

He loves reading books, traveling around the world.

He is a commerce postgraduate and Chartered Accountant. He has also cleared all levels of CFA(US) in the first attempt.

Disclaimer:
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all scheme related documents carefully.

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