Final Up to date on July 21, 2025 at 8:43 am
The mutual fund trade incessantly discusses how a selected fund or fund class is an “various” to a hard and fast deposit. Is that this true? Which mutual fund is an effective various to a hard and fast deposit?
The brief and factually right reply is none! No mutual fund or fund class is an alternative choice to a financial institution FD. The explanation ought to be apparent, however we regularly overlook. Mutual funds are topic to market dangers, whereas an FD is just not (at the least indirectly, until the financial institution made a number of operational errors).
Evaluating the returns (let’s make that common returns or common rolling return to sound fancy) and claiming that X fund/class is an acceptable various to an FD is totally incorrect.
Take, for instance, a debt fund, an fairness fund, an AIF, and a gold fund. All of those can supply the identical returns at totally different time limits. That doesn’t make them comparable or options of each other. The dangers of every are considerably totally different, and due to this fact they’re labeled as distinct asset lessons.
The identical argument applies right here. An FD and a mutual fund have totally different danger profiles, and due to this fact, you can not change one with the opposite. Whereas a hard and fast deposit is a hard and fast return instrument, a debt fund is just not. Its returns are totally market-linked. Because of this the returns may be constructive (larger or decrease than the FD) or damaging.
Sadly, the IT division fails to recognise this and taxes debt funds in line with the slab as a substitute of at a decrease charge with indexation, because it did a couple of years in the past.
There is no such thing as a mixture that may decrease the chance of a MF. Whether or not the fund has 100% bonds or cash market devices, or a touch of shares (conservative hybrid funds) or an enormous chunk of arbitrage (fairness financial savings or arbitrage fund), the chance is all the time there and sometimes larger than a easy liquid fund or cash market funds (which themselves are riskier than FDs).
So, if you wish to pay decrease tax than FDs and get related or larger returns, be ready for a capital loss. There’s nothing fallacious with this quest, however beware that the worth is considerably larger danger. There is no such thing as a different means. Mutual funds are topic to market dangers and liquidity dangers.
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