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Funds score over bank deposits
July 18, 2012

On the face of it, a bank deposit gives an investor more assurance of his money generating a good return. In reality, once taxes and inflation come into play, the investor is left worse off than had he opted for a debt fund.


Author : iFAST Content Team



 Funds score over bank deposits

Funds score over bank deposits

When rates rise, they do so across fixed income products. So it’s not just the returns on bond funds that will go up, but the interest offered on term deposits and other such fixed return instruments also follow suit. In the eyes of the retail investor, the tug is between opting for a bank deposit and putting money in a debt fund.

At first blush, term deposits score on the fact that they offer an assured return over a fixed period of time. As of today, 90-day bank deposits offer a return of around 7% p.a. while 1-year deposits yield 9% p.a. But if one takes the tax impact into account, the sheen quickly fades.

A look at the short-term debt funds over the past year indicate that the average returns are in the vicinity of 9.50% p.a. So while they are neck-and-neck in terms of returns, when the tax angle is brought into the picture, income funds emerge the winner.

Interest earned from a bank deposit is fully taxable in the hands of the tax payer. This interest is added to the individual’s total income and the tax at the applicable slab comes into effect. If one takes the highest tax bracket into account, the returns fall from 9% to 6.3%. Suddenly, they don’t appear lucrative at all. And when you take inflation into account, one is left with nothing.

The tax effect on term deposits

Amount  invested (Rs)

Tax slab (%)

Interest @9% p.a. (Rs)

Net interest earned (Rs)

Post-tax return (%)

100000

10

9000

9000– 900 = 8100

8.1

100000

20

9000

9000 – 1800 = 7200

7.2

100000

30

9000

9000 – 2700 = 6300

6.3

Which brings us to the question of how debt funds are taxed. Returns on debt funds are subject to capital gains treatment. The short-term capital gain in an income fund is added to the income and taxed according to slabs. In this case, the taxation is similar to that of bank deposits, hence we recommend that you hold your investment for over a year, when long-term capital gains sets in. Long-term capital gains from debt funds (investments held for more than one year), are subject to either 10% flat capital gains tax or 20% after indexation.
Taking into account the uncertain interest rate scenario, we are of the opinion that short-term debt funds are the place to park your cash in and we suggest these four funds.


Performance as on July 17, 2012

Scheme

 1-year return (%)

Religare STP-A(G)

11.5732

Peerless ST - Reg(G)

10.4972

Tata FIPF A3-Reg(G)

10.4373

Taurus ST Income(G)

10.2759

JM Short Term-Reg(G)

10.1513

Sundaram Select Debt-STAP(G)

10.1078

IDBI ST Bond(G)

10.1029

Pramerica ST Income(G)

9.9903

Tata FIPF C2-Reg(G)

9.9347

Birla SL ST Oppor-Ret(G)

9.9171

Tata FIPF C3-Reg(G)

9.8732

Taurus Dynamic Income Fund(G)

9.8454

HDFC Short Term Opp(G)

9.8001

AIG ST-Ret(G)

9.7836

JPMorgan India ST Income(G)

9.7784

UTI ST Income(G)

9.7779

Tata FIPF B2 -Reg(G)

9.7718

Religare Credit Opp-Reg(G)

9.657

Tata FIPF B3-Reg(G)

9.631

Morgan Stanley ST Bond-Reg(G)

9.4539

Tata FIPF A2-Reg(G)

9.4281

ICICI Pru Banking & PSU Debt Fund-Premium Plus(G)

9.4275

Templeton India ST Income(G)

9.3507

Kotak Income Opp(G)

9.339

DWS Short Maturity-Reg(G)

9.3054

Canara Robeco ST-Reg(G)

9.2062

ICICI Pru STP-Ret(G)

9.1711

IDFC SSIF-ST(G)

9.1632

Kotak Bond-STP(G)

9.1624

HDFC High Interest-STP(G)

9.1124

Tata ST Bond(G)

9.0645

ING ST Income(G)

9.0595

BNP Paribas ST Income Fund(G)

9.0236

HDFC STP(G)

8.959

DSPBR ST(G)

8.9294

Fidelity ST Income Fund(G)

8.913

HSBC Income-STP-Reg(G)

8.8314

Baroda Pioneer ST Bond(G)

8.5578

GS ST-Ret(G)

7.5911

Source: ACE MF


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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