Displace Fixed Deposits with Mutual funds to Grow Your Real Money- Part 1

Fixed Deposits with Mutual funds

Various experts say, investors who can, step ahead to take a little extra risk, should invest in Equity Savings funds to earn extra tax-efficient returns. We have seen many  investors who put their surplus money in fixed deposits,” One should park the funds in an  equity savings fund instead of a fixed deposit if one needs the funds after a year. 

Equity Savings fund invests 33% of the corpus in pure equity making it less-riskier than balanced funds. Another one-third in arbitrage and the rest in fixed income. This scheme is thoroughly not parallel to fixed deposits, as with fixed deposits, you are promised your principal as well as interest, which is taxable. A well-known traditional option of  Equity savings funds can occasionally deliver downfall in value. 

Financial advisors & Market Experts have been always critical of keeping money in fixed  deposits. The reason for the same is that the interest earned in a fixed deposit is unable to beat inflation. And it is also taxable. Due to these vital reasons, we recommend arbitrage funds or debt funds for three years. 

Equity savings funds are better than debt funds in terms of taxation as they are treated  as equity funds for the same. This means if sold before a year, short-term capital gains  would be taxed at 15%. And post a year, will be termed as long-term capital gains where tax is nil at present. 

Balancing risk and return 

Equity Savings Funds are hybrid mutual fund schemes, which invest in both debt and  equity securities hence, both risk takers and risk averse can be benefitted. Their focus is to balance the risk attached with various asset classes. Equity is a risky asset class,  but gives higher returns in the long term.  

SEBI has devised a “Riskometer”, which informs investors, the risk involved in each  scheme and advertises to encourage investors to refer to the “Riskometer” before  investing. Arbitrage funds are also considered as equity funds for the sake of taxation, but  they may offer a slightly lower return than equity savings funds. Equity savings funds would give you around 9-10% of returns. A slight exposure to equity  makes Equity savings funds less volatile which helps one to earn inflation beating returns.  The huge chunk of corpus is pooled in arbitrage and debt which brings the stable returns.  One-third of the corpus is exposed to pure equity which gives a higher return.

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