Buy 1, get 3 free!

We know what you’re thinking: “There seems to be something wrong with the headline! Nowhere in the world do you get such incredible offers – unless of course it’s a clearance sale, that too most often of stuff that’s perishable.” Or maybe you are thinking: “Aha! Now they are talking. Their earlier articles (found here and here) were so full of rumblings about mundane things like investing. Thank god they’ve learnt soon enough what we are truly interested in – offers, offers and more offers!”

For those of you who’s curiosity has been piqued, we would not like to keep you waiting for long on this one. We are talking about an incredible yet easy-to-miss offer available right under your nose – a Debt Mutual Fund! Given this is the season of offers, schemes and discounts galore (remember the big billion day sales that just went by?), we thought to apprise you of something similar available in the world of investments.

When we decide to invest into anything other than a bank Fixed Deposit, we tend to look for the following:

• How safe will my money be? (most important criteria in our minds at all times)
• Will it give me higher returns than bank fixed deposits? (most common benchmark for almost all of us)
• Will I be able to save on tax to be paid on my earnings from this product? (we all hate paying taxes, don’t we?)
• Can I withdraw and use my investment monies anytime? Or will it remain locked for long?

If an investment product scores badly on any of the above factors, we tend to think hard and long before we say yes. If we are not convinced, we simply go to our nearby bank branch and park our surplus money into an FD – which still remains the absolute safe bet in our mind-space.

So let us evaluate both Bank FDs and Debt Mutual Funds on the above 4 criteria:

1. Safety:

An FD is safe till your bank acts responsibly in doling out loans to others – using your money. Recent bank NPA disclosures are a testimony to the fact that banks too can get careless when it comes to managing your invested capital. As a result of which they are equally likely to fail and go bankrupt as any other organization. Given these recent debacles at banks anyone who still thinks that they are the safest institutions to park their hard earned money with, are simply living in denial (also called a fool’s paradise!). It’s high time they wake up. Debt Mutual Funds on the other hand are equally safe or risky as bank FDs, for they are largely lending to the same entities (assuming they are good) that come to banks for loans, and they too are equally diversified across such entities (if not more) as banks - that too in an environment with much tighter regulations and higher transparency than what banks operate in.

So given safety of money is on top of our minds when it comes to selecting a product for investment, a Debt Mutual Fund certainly fits the bill – as much as a bank FD does. For most people, this is where the buck stops. But wait, there’s more! The pudding only gets sweeter from here. Didn’t we say ‘Buy 1, get 3 free’?

2. Higher Returns:

Debt Mutual Funds generally score better on this one. And that’s simply because they largely pass through the higher interest they earn from the entities they have lent to. They only get to keep a small part from their overall interest earnings (which too is highly regulated and is a small fraction of what banks earn). Therefore, they almost always give higher returns than bank FDs. The only downside in this aspect with them is that they do not commit the returns beforehand, like FDs do. However, one quick glance at their historical performance is enough to assuage any uncertainties in this regard.

3. Lower Taxes:

Debt Mutual Funds clearly take the cake on this one. Thanks to the Government, any investment in a debt fund over and above three years gets a benefit in tax treatment called ‘Indexation benefit’ (this simply means we pay lower tax on the earnings). Bank FDs have no such benefits to offer. So anyone still wanting to stick to investing in an FD – good luck living in the paltry ‘post inflation, post tax’ earnings you are going to get from one.

4. Easy withdrawals without penalties:

Once again, Debt Mutual Funds come out on top on this one. A large proportion of debt funds do not levy any charges on withdrawals. They also do not cut any portion of returns earned during the period of investment if you withdraw prematurely. In-fact many debt funds also credit your bank account with the money almost immediately. Bank FDs on the other hand, although credit the money in your account immediately too, usually penalize by reducing the interest that they pay if you withdraw prematurely. Add this loss to the already higher tax that you are liable to pay on interest earned through an FD, and you may end up earning much lower than prevailing inflation levels.

So there you go! As promised, all those who up until now were looking to park their monies in a bank FD, are entitled for an irresistible ‘Buy 1, get 3 Free’ offer by a Debt Mutual Fund. You do not compromise on safety in a debt fund, and also get higher returns, lower taxes and penalty free anytime withdrawals – all packaged neatly and robustly together – absolutely free.

Happy investing!

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)