TIME TO SAVE YOUR RETURNS FROM FALLING INTEREST RATES

In recent years, bank interest rates on fixed deposits and savings accounts have declined significantly, reducing the returns that individuals once earned on their investments. According to financial data, the reduction is estimated to be over 25% of what people used to earn just a few years ago.

Today, certain banks offer savings account interest rates as low as 3.5%, while fixed deposit rates hover around 6% for a one-year term. This sharp decline raises concerns for investors relying on these instruments to grow their hard-earned money. Fortunately, there are more lucrative alternatives to consider.

Shift to Mutual Funds to Counter Low Returns

Mutual funds present a viable alternative for those who feel their savings are being eroded by low-interest rates and inflation. With tax benefits, professional fund management, and the potential for higher returns, mutual funds can be a strategic investment choice.

Alternative to Savings Bank Accounts

If you want to earn better returns than a standard savings account, consider investing in Liquid Mutual Funds. These funds provide stable returns while maintaining liquidity similar to a savings account.

• Instant Redemption: You can redeem up to Rs. 50,000 instantly, 24/7. For higher amounts, the funds are typically transferred within one working day.

• Convenient Transactions: With seamless online transactions through net banking and apps, investing in liquid funds is simple and efficient.

  
  

Alternatives to Fixed Deposits and Recurring Deposits

For those accustomed to investing in Fixed Deposits, Debt Mutual Funds offer a compelling alternative with potentially higher returns and tax efficiency. Debt mutual funds come in three primary categories:

• Ultra-Short-Term Debt Funds: Suitable for investment horizons up to one year.

• Short-Term Debt Funds: Ideal for investment periods of one to two years.

• Long-Term Debt Funds: Designed for holding periods of three years or more.

  
  

While the returns from these debt funds are not fixed, they typically range from 6% to 10%, depending on the investment horizon and market conditions. In some cases, returns may be even higher based on strategic credit calls by fund managers.

Taxation: FDs vs Debt Mutual Funds

The tax treatment of fixed deposits and debt mutual funds differs significantly:

• Fixed Deposits: Interest income from FDs is fully taxable each year. TDS at 10% applies if the interest income exceeds Rs. 10,000. If PAN is not updated, TDS may increase to 20%.

• Debt Mutual Funds: Returns are categorized as capital gains. Taxes are payable only upon withdrawal, allowing the investment to grow without annual tax deductions. Long-term investments (over three years) qualify for long-term capital gains tax with indexation benefits, potentially reducing the tax liability.

  
  

Conclusion

In the current economic scenario, where interest rates on traditional savings instruments are steadily declining, it is prudent for investors to explore alternatives like mutual funds. By investing in liquid and debt mutual funds, you can not only safeguard your returns from falling interest rates but also maximize tax efficiency and potentially achieve higher growth.