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My 15 lakhs FD matured. How do I use the money?

As per a recent survey by SEBI, more than 95% of Indians prefer parking their money in Fixed Deposits (FD). Well, if that is true by any measure, then it is only likely that a good number of those FD(s) are maturing every single day. And the looming question is – Should I start another FD?

Before we answer this question, let us look at the various options we have in hand.

Retain it as cash – Unless you have a spending need within the next 7 days, there is ABSOLUTELY no reason to consider this. Liquid funds work best for any spending needs in near future. Idle cash at home is like a bucket of still water. The level only depletes with time gradually.

Start another fixed deposit – Fixed deposit returns have been falling and the extent of our expenses is increasing. Healthcare costs increase by approximately 15% every year. Are the fixed deposit returns still attractive? We would say a big NO to that. Low returns coupled with taxation of returns renders them to be an unattractive investment destination. With easy access to better information, a lot of Indians are now realizing this. Have you awaken yet?

Invest in debt funds – Debt funds are a type of mutual fund which invest in debt related instruments like Government bonds, corporate bonds, commercial paper (CP) etc. The reason a lot of people are now shifting to debt funds is because of better returns and lower taxation possibilities. With the tax net getting stringent, it only makes sense to explore all possible avenues of reducing tax liability. Read more about how debt funds fare better over FDs here

Invest monthly in equity funds – Equity mutual funds are the latest talk of the town. Useful or in-vogue, whatever you call them, they are amongst the very few wealth creating asset classes available to Indians today. A pre decided monthly investment in equity mutual funds can result in double digit returns over the long term. But only and mostly over the long term. And by long term we mean that your money should stay invested for more than 5 years. For example, an investment of INR 80,000 over 18 months (INR 14.4 lakhs) can lead to a corpus size of INR 41 lakhs after 10 years (Assuming annual return of 12%). And that too tax free.

Therefore in conclusion, the best investible options available are debt and equity mutual funds. You can choose either of them or a mix of them depending on your risk profile, return expectations and time horizon.

How do we help?

At CAGRfunds, we assess your complete profile in terms of risk, return and time horizon and accordingly make customized suggestions to you. We ensure that your money gets invested in the right avenues and meets your expectations.

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Is your fixed deposit making you wealthier?

Last week, I met a lawyer on my flight to Delhi. Since I had nothing better to do, I broke the ice and soon, we started discussing about my favorite topic – how do we get wealthier over the long run.

So I asked my new found lawyer friend, what does he do with his surplus funds? Immediate response – “Fixed Deposits!” So I then asked him why? And with a very perplexing look, he said – “My money grows at 6.5%. Do I need another reason?”

That is when I realized the lack of awareness that is prevalent even amongst the learned breeds of lawyers. I therefore introduced him to the concept of Debt Funds.

Debt Funds are those mutual funds which invest in debt instruments like bonds, debentures and money market instruments. But why are we comparing debt funds to fixed deposits?

Fact 1: Debt funds on an average give an annual return of 7.0% – 8.5%. SBI 1 Year Fixed Deposit yields 6.9% interest annually, and a 3 Year Fixed Deposit yields 6.50% annually.

Fact 2: If money stays invested in a debt fund for more than 3 years, then you end up paying considerably lower tax on the returns from such debt funds. This is because of the indexation benefit. Indexation implies to inflating purchase cost to account for inflation. As a result, returns which are subject to taxation is reduced. Also, such reduced returns are taxed @20%. However, in case investments are held for less than 3 years, the gains are added to the income of the investor and taxed as per the income tax slab rate applicable.

Fixed deposits are taxable as per the applicable slab rate of the investor, irrespective of the holding period of investment. That doesn’t sound good at all!

Let us understand by examples:

Consider an investor with income of INR 15lacs. He is willing to invest INR 1lac. The tax slab for this investor is 30% as per the income tax slab.

Case 1: Comparison of FD vs Debt Fund, assuming different rate of returns (as per Fact 1 above)

 

The net gain from investing in Debt funds exceeds in both the holding periods, so the investor is better off by investing in debt funds after taxes.

Due to indexation benefit, the purchase price has been inflated from ₹100,000 to ₹119,808, thereby reducing the tax liability from ₹6,238 in FD to ₹539 in debt funds. This benefit is available when the holding period is 3 years or more.

Case 2: Let us consider a scenario where returns from debt fund are the same as that of FD

An investor is better off by ₹6,051 even if the returns are same, in case holding period exceeds 3 years. Hence, debt funds are more tax efficient than fixed deposits in every scenario.

Time you think about the funds lying in your bank account?

Read More: Will Debt Funds help your create wealth?

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9 financial mistakes I wish I had not made!!

“I do not regret the things I have done, but those I did not do” – Rory Cochrane

I cannot agree more to the statement above. Through a large part of my working 20s I believed that we earn a living to live an enjoyable life in the present. Makes perfect sense. But it was only until recently that I started to think differently. It took a medical emergency in my family to make me realize the importance of financial planning. As I reflect on my past, I realize I made several mistakes, all of which could have been avoided had I thought about the uncertainty that future holds.

Mistake 1: Reckless Expenditure

I never made a budget for my expenses. Spending on anything and everything I ever wanted was my road to happiness. But now I have learnt that it is important to differentiate between what I need and what I want. A careful thought before every purchase we make will uncover the extent of our wasteful spends.

Mistake 2: Inconsistent savings

I never thought about savings. I spent first and then whatever was left at month end amounted to my savings. A recent consultation with a financial advisor coaxed me to take a reverse approach. I now decide the percentage of my salary I want to save and then plan my expenses.

Mistake 3: Saved but not invested

I never looked at money beyond my bank account. Whatever I saved, sat idle in my account, growing only by a meagre 4% every year. As per NSSO data, between 2004 and 2014, the average medical expenditure per hospitalisation for urban patients increased by about 176%. Ever wondered how your bank balance will cater to your future needs? Channelizing our savings into return generating assets is inevitable now.

Mistake 4: No emergency fund

A year back someone asked me if I had an emergency fund. I thought it was a crazy idea to plan for an emergency. But if only such situations came knocking at the door. It is advisable to park at least 6 months of expenses as an emergency fund so that any untoward incidents can be accounted for.

Mistake 5: Excessive use of credit card

My credit card enabled me to defer my payments. So, I seldom had control over how much I was spending. Not to mention, the innumerable defaults I made in repaying my credit card bills. Sometimes, I did not have sufficient money to pay it back and sometimes I just forgot. I now keep just one credit card with a very tight credit limit.

Mistake 6: Got greedy about making quick money in the stock market

My friends used to regularly tell me about how stock market offers opportunities to make quick profits. I saw someone make 30% profit in 8 months and I felt like I am missing out on the rocket to richness. So I immediately invested all my savings in a “tip” I received from one such friend. I had no idea what business that company was in, who managed the company and how did they make money. All I was interested in was my 30% profits. Well, after 3 years, I made a loss of 35%. Anything that is too good to be true, is perhaps not true. Lesson learnt the hard way.

Mistake 7: Got excited about “instant” personal loans

I once got a message that I was eligible for an instant personal loan. I was royally ecstatic. No questions, no checks. I grabbed the opportunity with both hands. Little did I read the footnotes about exorbitant interest rate. Thanks to my financial advisor, I now know the difference between good loans and bad loans.

Mistake 8: Trusted my Provident Fund to be sufficient for my retirement

I had been living under this solemn belief that my PF balance will be more than sufficient for my retirement. No, I did not make any calculations. I was simply assuming that the Government had us covered. But as alarming as it might sound, my PF balance might not cater to even 10% of my needs when I retire. Again, channelizing our savings into return generating assets is inevitable now.

How do we help?

At CAGRfunds, we help you NOT commit any of the above blunders. With a careful analysis of your cash flow and future goals, we tell you how much you need to start saving every month to ensure a comfortable and peaceful future. We also be with you throughout your financial journey to help you manage your financial commitments and make course corrections if required.

Contact us

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Do you get attracted by market forecasts?

“Bullish on market, see Sensex at 32000 by December 2016″ – Citi Jan 13, 2016

“Citi’s December 2017 Sensex target at 31500, implies 5% upside”- May 05, 2017

We often come across news headlines such as above. The “expert” forecaster’s ever changing goal posts.

Forecasts are everywhere. The financial markets are inundated with forecasts by the so called “experts” either on TV or in print media. This is not an article against any single forecaster. I am just trying to show how wrong the so called experts can go while predicting the financial market’s movement.

We as human beings by nature look for certainty, in an uncertain future. This is the reason, unfortunately as investors we tend to give far greater weight to these “predictions” in print or on TV. As Howard Marks of Oaktree Capital wrote in his memo to clients on the same topic “The opinions of experts concerning the future are accorded great weight . . . but they’re still just opinions.”

Many of my friends and relatives come up to me and ask questions like “Is the Sensex going to touch 35000 by Dec 2017?”, Or “Is RIL stock going to cross 2000 this month?” My answer to all such questions is unequivocally “I don’t know”.

I would always advise everyone to not invest on basis of forecasts. Always do your own due diligence before making an investment decision. As per a legend, one of the top bankers in the world, JP Morgan when asked about what stock market will do, replied, “It will fluctuate”. If one of the top bankers in the world doesn’t know, we better avoid falling into that trap.

Having said that, there is a difference in forecasting and making a probability based judgment. Judgment based on proper due diligence is far better than opinion of experts. We as investors should avoid the noise surrounding us. We should try to focus on our own analysis of important and relevant information to do our investments.

I would close this article with an excerpt from the Howard Marks’ Memo titled “Expert Opinion” which is a huge inspiration for this article, and, also because I could not have put it any better.

One of the most powerful things we can do as a human being in our hyper connected, 24/7 media world is say: “I don’t know.” Or more provocatively, “I don’t care.”

Not about everything, of course –just most things. Because most things don’t matter, and most news stories aren’t worth tracking