Despite banks reducing deposit rates, Mutual Funds are a good investment option

Indian banks have been slashing fixed deposit rates from quite some time now. 

Post demonetisation, the banks are now sitting on huge cash pile. On April 29, State Bank of India (SBI) had cut interest rates on fixed deposits by 25-50 basis points (bps) in select maturity baskets. 

On April 23, Bank of Baroda reduced interest rates in the smaller tenure FDs and raised interest rates for the longer duration FDs. The lender reduced interest rate from 7% to 6.90% in FDs of one-year tenure. Moreover, on April 28, Axis Bank raised interest rates in select maturity baskets by 25 basis points. 

Despite FDs being the most favourable and safest investment option, should you be investing in it?

To give you better returns tax saving options, Mutual Funds come in competition with FDs. Mutual Funds are divided based on the asset class, and one of the most safest option is Debt Funds. 

Debt Funds are the funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns.

If you look at the tax ssavings option, according to Archit Gupta, Founder & CEO ClearTax.com, FDs are short-term in nature. They come with a lock-in of 5 years. The biggest disadvantage of FDs is that the interest income is taxable as per the relevant tax slab. This eats into the returns earned in a major way. The initial returns of 7-9% become much lesser after tax.

On the other side, Debt Mutual Funds do attract the same rate of tax as of FDs during the first year. However, it is taxed at a lower rate than FDs between the first year and third year. And, it becomes tax free from third year onwards. 

How Mutual Funds have become favourable option?

In the last financial year, or in FY17, the asset under management of domestic mutual fund industry rose for the fifth straight year by 35 per cent year-on-year, or Rs 4.8 lakh crore to an all-time high of Rs 18.3 lakh crore in FY17. 

According to the report by ICRA, the quarterly average assets under management also registered a quarter-on-quarter growth of 8% in the March quarter.

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As per the statistics shared by AMFI for March 2017, the total assets under management stood at 17.55 lakh crore rupees, more than triple the Rs. 5.87 lakh crore in March 2012. This shows that an increasing number of investors are trusting mutual funds to help them create long-term wealth in a tax-efficient manner.

Speaking with Zeebiz, Adhil Shetty, CEO & Co-founder Bankbazaar.com, said, "Mutual funds allow investors to invest towards any financial objective for any investment horizon. You can buy mutual funds for as little an amount as Rs. 500. You can enter or exit a mutual fund as per your requirement (except ELSS funds). The sheer versatility of mutual funds, the possibility of above-average returns, tax efficiency, easy entry and exit, all make it a great investment option."

So, even though banks are reducing the FDs rate, mutual funds could be considered as investment option over it.

Disclaimer: This story is for informational purposes only and should not be taken as an investment advice.