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3-year, Low Risk Surplus? Look Beyond FD's

The next time you're about to book an FD in haste, take a moment to consider debt funds as a much superior option instead

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The CBDT (Central Board of Direct Taxes) recently released the Cost Inflation Index (CII) figure for FY 2016-17 as 1125, up from 1081 a year ago. At just 4 per cent, this has been one of the more controlled rises in the CII in the past few years; it shot up 10 per cent from 852 to 939 just a couple of years back. Congratulations are in order for reigning in inflation, at least for now!

However, if you consider the rise in CII over the past three Financial Years, it is a less demure 19.8 per cent (as the number gets compounded each year).

It's safe to say that in a growing, inflationary environment such as India, any three year CII growth figure below 16-18% will be atypical to say the least. Why not use this to your advantage by earning a much better post tax return on your low risk investments?

It's not an unknown fact that FD's remain an investment instrument of choice for many Indians. However, if you're planning to park the moneys for a period of three years or more with a requirement of high capital safety, debt mutual funds should be your asset of choice. The only caveat is that Fixed Deposits provide an assured return, whereas debt funds do not. However, this shouldn't discourage you from opting for the latter.

Even within debt funds, we have various categories (GILT, Dynamic Bond, Credit Opportunities, Cash, Income, etc), each suitable to a different category of investor. Consult a qualified Advisor to gauge which one fits your requirement best.

In the past three years, a number of debt funds have performed outstandingly well - some even clocking CAGR's in excess of 11-12 per cent. BSL Medium Term, UTI Income Opportunities and ICICI Prudential Corporate Bond Fund (all three with 3-year returns of 11.8%) are cases in point. However, it would be optimistic to assume that such outperformance would continue; let's assume that the 3-year performance benchmark for a good quality, well managed debt fund will be closer to 9.5 per cent.

Here's how a portfolio of debt funds is likely to stack up vis a vis a 3 year fixed deposit, assuming that you're in the 30% tax bracket.

As the above illustration indicates, a 3-year Fixed Deposit is likely to underperform a portfolio of debt funds by close to 12 per cent, after factoring in taxation. On a 10 lakh corpus, that's a sizeable difference of close to 1.2 lakh.

The next time you're about to book an FD in haste, take a moment to consider debt funds as a much superior option instead.


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cbdt Cost Inflation Index Dynamic Bond cagr