This question is every investor’s dilemma. Due to lack of knowledge and due to peoples habit of bad mouthing the equity markets. Fixed Deposits have gained a lot of popularity. Let us first understand these two terms.
An Equity Systematic Investment Plan is when an individual invests a fixed sum of money periodically over a long period of time to gain from the benefits of rupee cost averaging. Here the client gets to benefit from all the market prices of the units being bought by him/her. For example: if “A” starts an SIP of Rs 5000 per month, he will be investing only Rs 5000 no matter what the market price of the stock will be, when the market price of the unit or stock will be high he will get lesser units or shares and when the market price is low he will get more units or shares, but Rs 5000 will be fixed. This procedure helps the client to get better returns in the long run and also helps the client to make more money by way of compounding.
On the other hand people believe that Fixed deposits are a safer bet… of course they are you get your fixed returns, your money is safe in the bank you even have the peace of mind that you will get a return of 9% percent. Doesn’t seem bad at all now does it…? But have you considered tax and inflation which the bank salesmen conveniently leave out? That’s the biggest catch… because after deducting tax and inflation your money depreciates every year. Let’s crunch these numbers properly below.
For example you start a FD of Rs 1000
Principal amount : 1000
Return (+) 9%*
Total : 1090
Tax (on gain i.e. 90) (-) 30%*
SO now total : 1063
Inflation (-) 5.41%* ie (57.5)
In hand : 1005
Therefore you are getting a return of Rs 5 on 1000 every year.
Let’s compare this to Equity SIP
Principal amount : 1000
Return (+) 17%*
Total : 1170
Tax free : 1170
Inflation (-) 5.41% ie (63.30)
In hand : 1106
*Percentage values as on December 2015
So as you can see there is a return of only Rs 5 in the FD as compared to 106 in the equity markets. It is not as unreal as it sounds. It is true. Since inception the SENSEX has given a return of 17%p.a. on an average and other equity portfolios have given even more than that. According to these calculations there is guaranteed loss if money is invested in an FD for a long period of time and that completely changes its purpose of being risk free.
Have you ever thought of what the bank does with the money provided to them by fixed deposits? I’m guessing not. They invest your fixed deposit money in the stock market and gain huge returns. That is why so many banks are called as “institutional clients” and this same thing goes for insurance companies as well. That is exactly how they are able to give you returns that are far lesser than what they are actually making. You are basically giving them money to make money. Therefore in the long run you will be at a major loss if you “invest” in fixed deposits.
On the contrary, if there is an urgent requirement of funds by an individual on a time horizon of 2 years then you must not invest that money in the stock markets as the stock market gives desired returns only in the long term i.e. 5-10 years. Therefore when there is a requirement of money for an urgent goal, money should be put in a fixed deposit. And if there is no requirement for urgent money and you are saving money with the motive to invest and get returns then starting an SIP is the best and the safest best in long run. It will not only help you save but it will also give you a handsome return which will be tax free.
By greekfood-tamystika from Pixabay