YES, you heard it right – in this article we are going to use a simple comparative analysis to understand how your returns could be doubled by using debt funds and trebled by using equity funds over a 5 year investment horizon.
Fixed Deposit (vs) Debt Funds
Let us say our investment horizon is 5 years. Rs.30 Lacs in FD at 6% interest p.a would fetch a post-tax return of 4.13% (considering the highest tax bracket of 31.2%). Crunching the numbers, your FD would earn Rs.9 Lacs interest in total, on which you would pay Rs.2.8 Lacs in taxes and be left with an accumulated sum of Rs.36.19 Lacs at the end of 5 years.
If you had invested the same Rs.30 Lacs in a debt fund with similar returns at 7% p.a, you could have doubled your returns in 5 years!
Fixed Deposit (vs) Equity Funds
If you had invested the same Rs.30 Lacs in an equity fund with returns of say 10% p.a and had remained invested for the same period, you would pay ZERO tax and be left with Rs.48.3 Lacs at the end of 5 years. That amounts to trebling your returns!!
The above *illustrative* scenarios are presented for one to comprehend how the higher returns, tax advantages and the powerful compounding principle works simple wonders to multiple your returns!! However, do not use it blindly – as to what funds to invest in, when to invest, how long to stay invested, whether to go for lump-sum or SIP and all other questions that you may have, it is best to perform a detailed investment planning with your financial planner!
Although mutual funds comes with its own risks, there is a suitable fund to cater to everyone’s risk appetite and propensity. Perform a careful fund selection with your financial planner, get your tax savings worked out and make a sound investment decision – you are in to reap good returns in the long run!