Comparison Between Mutual Fund SIP and ... - Personal Finance

Financial decisions are based on prior experiences, our needs and wants and our risk appetite. So one man?s financial decision may not work for the other man. That?s why when comparing financial products; we need to be mindful of our own individuality.

Even when we compare products, we have to wary of the mixed signals of the India growth story. On the one hand, we see that the Indian economy is beset with problems like stagflation, low growth, depreciating currency and fiscal deficit, we also believe that the next power in the world economy could be India

While we Indians have a preference for safe instruments which are not at all risky, we must explore products that consistently beats inflation and gives us better return on investments.

Here?s an example authored by Larissa Fernand, an Editor at Fundsupermart on MoneyControl website

In such ambiguity, ignore the noise for the moment and tackle plain numbers.?
Let us assume that you invested in a term deposit five years ago. At the same time you started a started a systematic investment plan (SIP) in a mutual fund. What would have been the outcome today?

Investment	SBI Magnum Emerging Businesses (equity fund)	Term deposit (with a bank)
Tenure	5 years	5 years
Amount invested	Rs 1,000/month over 60 months = Rs 60,000	Rs 60,000 at one go
Return	The worth of the investment on August 5, 2012 would be around Rs 98,000, resulting in an annualized return of 16.35%	The fixed deposit on maturity would amount to marginally above Rs 94,000 at a return of 9.60% p.a.*

* According to data provided by the Reserve Bank of India (RBI), term deposit rates of major banks for more than 1-year maturity in July 2007 were in the range of 7.509.60%. We went with the highest rate.

The investment in equity gained over all fronts. Why?

Though the amount invested in both cases was Rs 60,000, the investment in the fund scored because you did not have to put down that amount at one go. There was no strain on your finances. Instead, you disciplined yourself into investing every month over 60 months! In the case of the fixed deposit, you had to part with that much of cash at one instance.

On maturity, you do not have to pay any long-term capital gains tax on your mutual fund investment if you hold the units for a year before selling. In the case of the term deposit, you would be taxed according to the income bracket you fall under. If you fall in the highest tax bracket of 30%, out of the interest you earn in the above illustration, a little more than 10,000 would go in taxes.

No matter the turmoil the equity market faces, in the end investments in good businesses will deliver. If you invest and stay grounded in a good equity fund (note, the catch here is to invest wisely, not blindly), you stand to win over the long term. Despite a term deposit giving the impression of a safe haven, it will turn out to be a losing proposition once you take taxes and inflation into account.

The jury is out on this one.

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Source: http://personalfinance201.com/Investing/comparison-between-mutual-fund-sip-and-fixed-deposits-fd.html

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