Trumping bank deposits

Traditionally, prudent investors have kept large sums of money in fixed deposits with trusted banks. While the perceived wise continue to do so, today it is smarter to explore new options to manage your money more profitably.

While fixed deposits are a safe investment avenue because of fixed interest rates and lock-in periods, debt mutual funds have evolved into an alternate investment option. Among these, liquid funds and income funds are available to investors.

Debt funds have some obvious advantages over bank deposits, the most important being tax efficiency. Mutual funds offer higher post-tax returns than fixed deposits. The dividend is tax-free, and the income from units held for more than a year is considered a long-term capital gain and qualifies for indexation benefit. This reduces the tax incidence.

Liquid funds keep the money liquid (almost like cash) and invest in money market instruments, which are characterised by short-term borrowing and lending. So if you come by a windfall, liquid funds are safe short-term options for investing large sums of money.

Compared with liquid funds, income funds provide holistic benefits to investors who have long-term investment horizons. They also share functional attributes with fixed deposits—while deposits fetch an interest, income funds provide attractive returns.

If one were to account for the impact of tax and inflation on fixed deposit returns, the benefit would be negligible. Due to lack of awareness, retail investors tend to put their money in short-term deposits. There is no doubt that hesitation to invest in mutual funds is the result of a psychological barrier, not of the mechanics of finance. Moving past this notional filter can be the first step towards efficient money management.

Nandkumar Surti is CIO of J.P. Morgan Asset Management