I started investing in mutual funds in January 2018. My portfolio has about 85% in equity and rest in debt/others. Till December 2019, I was getting a return of about 12% on my entire portfolio. Now, its giving negative returns. So, how is a mutual fund better than FD?
Most of your investments are in equity mutual funds. As you would know, equity mutual funds mostly invest in stocks. And stocks do not offer steady returns like bank deposits. Stocks may offer modest return in a year, negative return in the next year, stupendous returns the year after that. Years of bull markets may be followed by long years of bear markets. That is why equity is considered risky and volatile in the short term. However, equity has the potential to offer superior returns than other asset classes over a long period of time. That is why equity mutual funds are recommended to achieve long-term financial goals like retirement. Though not steady, you may hope to get around 10-12% returns over a long period.
Mutual funds also offer better after-tax returns than fixed deposits. Interest on fixed deposits is added to your income and taxed according to your income tax slab. If you sell your debt mutual funds before three years, the taxation is the same – returns are added to your income and taxed at applicable income tax rate. However, if you sell your investments after three years, the gains are treated as long term capital gains and taxed at 20% with indexation benefit. The indexation benefit helps to bring down the taxes, especially in an inflationary scenario.
Equity mutual funds are taxed differently. If you sell your equity mutual funds before a year, returns are taxed at 15%. If you sell them after a year, gains of over Rs 1 lakh in a financial year is taxed at 10%.
You will also have to account for taxes while comparing different investment avenues.