Why you should not invest in Fixed Deposit

General
61

haha, peanut saga continues. You are still thinking about this at 4 AM ? :slight_smile:

Now what will i do with this much at once ? It will go stale, so now i either need to give it away to people around me or to sell it off. In both case since cashews are valued higher, cashews it will be. I could also buy peanuts out of some of the proceeds and mix it with smaller amount of cashews.
If strictly for my own consumption, then nothing changes. I will still limit potions as these are high calorie things.
If you meant that diet restrictions are irrelevant, then as i said cashews are slightly tastier, never denied that.

62

I was partying till then and before sleeping am soooo used to checking replies here :rofl: :stuck_out_tongue_closed_eyes:

This is all that I was always trying to say. Strictly from Financial point of view we will chose the one which is valued higher irrespective of whether we need it or not. We can sell it off if we don’t need it and then buy what we need.

I never thought this would go this far. Now I even forgot the context in which I first used it. :sob::sob:

63

Very ironic isn’t it. But it only takes one or two guys neatly dressed in suits and boots with big big AMC name like Tata, reliance with big degrees to literally talk the same stuff in zerodha varsity and persuade them to buy their mutual fund where they won’t tell about fund managers performance & history, portfolio , expense ratio and how many times the fund has beaten the index in previous years. Their marketing is that brilliant that they will say things like they have experienced people that have great degrees and studied & graduated from god level Universites managing their money. They will also say big managers, senior managers, directors, advocates have all bought this mutual fund. Funny thing is this type of marketing works 99%.

But they won’t ever believe anything what we say🤣. I mean most of us fight with each other over asset allocation and use logical facts unlike marketing BS, but all of us have crossed the 5lakh networth mark , proven experience managing money and just an exam away to become RIA, but almost nobody would trust what we say. The irony!

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64

All our talk about indexation benefit is of no use now. Debt funds will be considered at par with FD when it comes to taxation.
@neha1101 happiest person right now. :sob::sob::sob:

66

Yeah. Seems like govt didn’t like this debate going one sided :joy:

67

Nothing changed for FD investors, and now ( if it happens) they will have no option to reduce impact of inflation by moving to Mutual funds.

Real rates post tax become lower for all, will probably stay negative. That’s not something to be happy about. Bad news for retired folks who cant take too much risk on their investments. I dont know what to say to anyone happy about this. Opinion more important than finances ?

Also MF may still be better as taxes are deferred and you can keep compounding. But will have to factor in expense ratio.

Glad i can trade.

68

If this reform comes into effect

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then the retirees & Sr. people might redeem their debt funds now at 20% and then re-invest it some where else to save the 10%

Govt. looking at steep immediate tax revenue from the rejig :slight_smile:

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69

I think this is applicable only from 1st April 2024, and old investments are grandfathered.

On the contrary, people will hold on to their old debt investment, as they continue to get indexation, and invest more before 31st March.

70

are you sure that existing investments will not have new tax for redemption?

71

Nobody is sure because govt. has pulled out a rabbit from a hat, without giving out much details.
But that is what most news channels and MF CIO/CEO are reporting.

Also, generally such changes are prospective and not retrospective. Eg. When equity LTCG was introduced all old investment were grandfathered. So chances of that happening are high.
But need to wait from govt for clarity.

72

so govt is busy shoring up tax revenues

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73

This was and is expected, As it’s hard to get easy money in this higher interest rates environment.

Govt has to prepare for the big elections next year.

Expect more taxes in securities going forward.

74

This is a “Et tu Brute (You Too Brutus)” moment for me.

Where Debt Mutual Funds still score over Bank Fixed Deposits?

(Never imagined, I will ever copy and paste an article such as below - It is the same feeling Julius Caesar felt when he recognised Brutus, his companion being one of his assasin.)

1 Tax liability comes only at the time of redemption

In case of bank FDs, you pay tax on interest every year, whether you use the interest or not. The banks also deduct TDS on interest paid. So, if you are currently working and are in the 30% tax bracket, you pay 30% tax on this interest.

In case of a debt fund, the tax liability will only come at the time of sale. And gains at the time will still be taxed at 30%. However, there is a possibility. With debt funds, you can choose the time of redemption and thus you control (to an extent) the tax rate to be paid.

What if you were to sell this investment after your retirement when your tax bracket has fallen to 0% or say 5-10%? You will have to pay a much lower tax rate.

2 Your money compounds better in debt mutual funds

Since the tax is only at the time of redemption, this also helps compound your money better.

3 When you sell debt funds, the proceeds include both principal and capital gain

You put Rs 10 lacs in a bank fixed deposit. Interest rate is 10%. You need Rs 1 lac per annum.

The bank pays you 1 lac per annum (10% * 10 lacs). Yes, the bank will deduct TDS but let’s ignore it for now. If you are in the 30% tax bracket, you will pay 30,000 in taxes.

Contrast this with debt mutual fund. You invest Rs 10 lacs in a debt MF at NAV of Rs 100. You get 10,000 units. After 1 year, the NAV has grown at 10% (let’s say) to Rs 110 per unit. Total value = 11 lacs.

You redeem Rs 1 lac from the investment.

For that, you will have to sell, 1/11* 10,000 units = 909 units

Total short-term gains = 909 * (110-100) = Rs 9,090.

At 30% tax, you pay tax of Rs 2,727.

With bank FD, you paid Rs 30,000.

However, this is more flexible. Helps compounding since you are delaying taxes. And we must also account for the possibility that your marginal tax rate may come down after you retire.

4 Debt funds are so much more flexible than Bank FDs

You anticipate an expense in the family, but you do not know the exact date.** Let’s say a wedding in the family. Could happen in 2 months, 6 months, 12 months, or 18 months.

If you want to go with an FD, what should be the tenure of the FD? 3 months, 6 months, or 12 months? What are the interest rates? 4% p.a. for 3-month FD, 5% p.a. for 6-month FD, 7% p.a. for 12-month FD.

You find that the 12-month FD pays the most and go for it. But then, you need money just after 3 months. You will have to break the 12-month FD. The bank will not only give a lower rate (as you would have earned on a 3-month FD) but also charge a penalty. Your plan was to earn 7% p.a. but you earned (4% -0.5% penalty =) 3.5% p.a. for 3 months

Debt funds don’t discriminate. If the YTM at the time of investment was 7% p.a. and didn’t change thereafter, you will earn 7% p.a. for those 3 months.

Another point: You open FD of Rs 10 lacs. After a few months, you need Rs 2 lacs from this investment. You can’t break your FD partially. If you break, you lose out on higher interest and pay an interest penalty. Again, no such issues with debt funds.

Yet another: To me, it feels cumbersome to manage so many FDs. And you will end up with many FDs if you must invest every month. Yes, you can use a Recurring deposit to reduce burden. But RDs won’t help if your cashflows are not as predictable. With debt funds, you can simply keep adding to the same fund.

5 Debt fund will short term capital gains that can be set off against short term losses

This is a weak argument for choosing debt funds over bank FDs, but I will still put this down.

Debt fund returns will come in the form of short-term capital gains. Now, STCG can be set off through short term capital losses from any other asset (equity, debt, gold, real estate, foreign stocks).

Neha Brutus…

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75

This is what we were talking about when we were saying Bank FDs are very inefficient. Imagine the advantage we had with indexation benefit and LTCG advantage after 3 years. Even after these things are removed debt funds are better placed.
With indexation there was hardly any tax to be paid.

If debt fund was giving 7 percent and inflation was 5 percent we were paying tax only on 2 percent. Further just 20 percent of 2 which is 0.4 percent.
Whereas with FD which gives return of 7 percent, we ended up paying 2.1 percent.
Anyways this advantage is now gone. :cry:

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76

The U.S. Is Scaring Off Foreign Investors. Is It Becoming Un-investible?**Welcome to America the Un-investible.

says barrons.com

That seems like a strange thing to say because of the fact that U.S. stocks have outperformed the rest of the world, by a huge margin, over the past decade

Watch video to know more:

https://youtu.be/o6L3zcwoFPM

77

WOW! This comes as a real shocker. The biggest backer of Fixed Deposits in our forum - @neha1101 seems to have taken notice of the advantages being offered by the Debt Funds. This is the power of constructive communication on such forums. Even our hard core beliefs gets changed/modified/upgraded, when so many friends are trying to communicate some new information to us, by using so many different examples.

This thread has been very insightful. Thanks to all the friends who have expressed their views and have contributed in this thread.

78

Abb kya faida jab majority of advantage are going away this week. :sweat_smile:

79

Still there are a few days left till 31 March 2023.

If the investments are made till this date, then they will have the indexation benefit. Although this needs to be confirmed by the government, but most probably, this is going to be the case.

80

No, Never, ever, ever ever…will I giveup on MY FDs. When I read the article about bonds and the positives, I posted it - knowledge sharing - that is it. Everything has a positives and when I read the article, the positives were all genuine and true, so posted it.

For me personally, I will never give up on FD for the sole purpose of getting a fixed return like a salary everymonth. This should at least take care of my bread and butter. I am aware there are other instruments available in the market and knowing them in detail from this forum is a great. My foundation will be FDs as superlative returns is never my criteria. I might think of incremental funds being parked in these Gsec but never in Corporate bonds.

But you are right, this forum shares so much of genuine information that a user can take a constructive decision based on their financial need and strategy.

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81

“I’m Lovin’ It”

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