Why shouldn't I invest in a Fixed Deposit? is the most common question asked by the investors. Will you invest in a FD of 10k, if the net return will be 6.3% instead of an overall return of 9%?
Sachin Karpe explains how the fixed deposit calculated. If you have a fixed deposit of Rs. 10,000 with 9% interest rate, pre-tax interest earned during the year would be Rs. 900. Tax on the interest earned at 30% tax rate would be Rs. 270 and net amount earned by the investor would be Rs. 630. This translates into a net return of 6.3% which is much lower than the presumed return.
Sachin Karpe also advices to invest in long term fixed income i.e., debt mutual funds. Long-term capital gains on investments in debt mutual funds are taxed either at 10 per cent flat rate on 20 per cent indexed. Average return of short-term debt funds in the last 3 years is 8.9 per cent. If an individual decides to invest Rs. 10,000 in a short-term debt mutual fund, pre-tax returns earned for one year would be Rs. 890. At a flat 10 per cent tax, Rs. 89 would the tax amount. Net capital gain would be Rs. 801, whereas post-tax interest earned would be 8.01 per cent which is more than the interest rate of fixed deposit.
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