Fixed deposits still draw investors like magnets, as they guarantee capital protection. Yes, there are caveats in the form of (1) a lock-in period and (2) tax deducted at source. In comparison, savings bank deposits generally offer a lower interest rate. Alternately, liquid funds can be redeemed on shorter notice like one working day. They neither have a lock-in period nor deduct TDS upon redemption. The only caveat being that returns tend to vary as these funds invest in short-term securities having residual maturity up to 91 days.
Liquid funds offer a slightly lower return than fixed deposits. The average return on one-year fixed deposits is a tad over 8%, for the 10-year period ended August 2014i. In comparison, liquid funds, represented by the CRISIL AMFI Liquid Fund Performance Index, have generated annualized returns of 7.75% for the 10 years period ended February 29, 2016.
Returns as of February 29, 2016 and above one year are annualized
Data on deposit and lending rates related to five major banks displayed from the RBI website
Tax saving instruments - take your pick between PPF and ELSS
Towards close of every financial year, tax-saving instruments become high priority for investors; the most popular being the public provident fund (PPF) and equity linked savings schemes (
ELSS). Both these instruments enjoy the EEE status. Investors can open a PPF accounts in banks and post offices; alternately, they can park funds in ELSS offered by mutual fund houses. They can claim a maximum deduction from gross total income up to Rs 1.5 lakh per annum under Section 80 C of the Income Tax code.
However, there are some vital differences, highlighted in the below table.
Table 1: PPF vs ELSS
As reflected in the below table, the ELSS generates a higher return over seven-year and ten-year timeframes.
*Returns above one year are average annual returns; fiscal year is assumed **Returns of CRISIL AMFI ELSS Fund Performance Index as of February 29, 2016
However, ELSS make investment in equities & stock considered to more high risk product.
Physical gold versus gold ETF
Indians have always had a huge penchant for gold. Lot of physical gold is bought in the form of jewellery and coins, with demand rising during the festive and wedding seasons. It is also customary to gift gold coins to loved ones on special occasions. However, investments in physical gold (mostly jewellery) involve several risks, some of which are enumerated below.
Security:
Gold requires secure storage facilities and insurance against loss or theft
Purity:
If gold is not purchased from reputed suppliers or is not hallmarked, its purity could be lesser than that claimed.
Cost:
Suppliers mostly charge a premium over the market price, to cover making charges and other ad hoc costs. Further, physical gold also incurs carrying costs if kept in a bank locker.
Liquidity:
It is difficult to liquidate physical gold due to various reasons such as transportation, reliability of vendors, etc.
Transparency in purchase and sale-
In the absence of a fixed reference rate, each vendor has his own price for purchase and sale transactions.
Affordability:
Gold ETFs are affordable and ideal for retail investors as they can buy gold in smaller quantities. The minimum investment is one unit (equivalent to 1 gm).
No risk of theft:
Gold ETFs are issued in a demat form, thus saving investors from storage-related hassles and risk of theft.
Liquidity:
Gold ETFs can be easily bought and sold on exchanges.
Transparency in prices:
Prices of gold ETFs are quoted on exchanges.
However, for purchase of gold ETFs, investors incur expenses like fund management fee, demat facilities and other related charges. From a taxpayer’s standpoint, gold ETFs and physical gold attract capital gains tax, similar to that of non-equity funds. The short-term capital gains (STCG) tax is levied as per individual tax slabs and the long-term capital gains (LTCG) of 20% with indexation and 10% without indexation benefit, is applicable after three years.
Summing up
While most investors would still be highly inclined towards safer, traditional avenues such as bank deposits, PPF or physical gold, it is time they considered the new kids on the block – liquid funds, ELSS and gold ETFs to meet their larger financial goals and ensure returns are commensurate with the rising inflation.
Please consult your financial advisor for more details on mutual funds.
Disclaimer :
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related document carefully.