Final Up to date on July 21, 2025 at 8:43 am
The mutual fund trade incessantly discusses how a particular fund or fund class is an “various” to a set deposit. Is that this true? Which mutual fund is an efficient various to a set deposit?
The brief and factually appropriate reply is none! No mutual fund or fund class is an alternative choice to a financial institution FD. The explanation needs to be apparent, however we frequently overlook. Mutual funds are topic to market dangers, whereas an FD shouldn’t be (at the very least circuitously, except 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 appropriate 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 provide the identical returns at completely different closing dates. That doesn’t make them comparable or options of each other. The dangers of every are considerably completely different, and subsequently they’re categorized as distinct asset courses.
The identical argument applies right here. An FD and a mutual fund have completely different threat profiles, and subsequently, you can not substitute one with the opposite. Whereas a set deposit is a set return instrument, a debt fund shouldn’t be. Its returns are completely market-linked. Because of this the returns might be optimistic (greater or decrease than the FD) or unfavorable.
Sadly, the IT division fails to recognise this and taxes debt funds based on the slab as a substitute of at a decrease price with indexation, because it did a number 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 infrequently greater 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 greater returns, be ready for a capital loss. There may be nothing incorrect with this quest, however beware that the value is considerably greater threat. There is no such thing as a different approach. Mutual funds are topic to market dangers and liquidity dangers.
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