Whenever there is talk of safe investment in India, the first name that comes to mind is Bank FD (Fixed Deposit). FD is considered easy, safe and reliable. But due to changing interest rate cycles, rising inflation and changes in tax rules, relying only on FD is no longer considered the right strategy.
Why just FD is not enough?
Your money remains safe in FD and returns are fixed. But the real question is, what is left in your hand after deducting tax and adding inflation? If you are in 30% or more tax slab, then many times the FD returns after tax are less than inflation. That means money looks safe, but its real value keeps decreasing gradually.
If your investment horizon is at least 2 years or more, it may make sense to create a diversified fixed income portfolio that has a balance of stability, liquidity and tax savings.
What are the other options in fixed income?
- Now investors have many options apart from FD, such as:
- post office time deposit
- Government Bonds (G-Secs)
- debt mutual fund
- Income + Arbitrage Fund
- Arbitrage Fund
- Equity Savings Fund
G-Secs and Debt Mutual Funds
Government bonds are considered safe and offer an opportunity to lock in rates during good interest rate cycles. Whereas, debt mutual funds manage interest rate and credit risk professionally.
Income + Arbitrage Fund
In these funds, about 50-60% is invested in debt and the rest in arbitrage strategy. Long term capital gains tax (12.5%) is applicable on investments more than 2 years, which can sometimes be more beneficial than FD.
Arbitrage or Equity Savings Fund
For investors with a moderate risk appetite, these funds try to offer better post-tax returns than FDs with less volatility.
How much and where to invest?
No one formula applies to everyone. The investment decision depends on your age, tax slab, risk appetite and need. People nearing retirement can choose safer options, while younger investors can take a more balanced risk. There is no need to give up FD completely, but it is not right to depend only on it. It is wise to prepare a balanced and thoughtful fixed income portfolio, which keeps the capital safe and can also beat inflation.
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