Fixed Deposits Vs Debt Mutual Fund

Hornmerchant
TM
+91 88 84 00 99 88www. Hornmerchant.com
Welcome!
An initiative to spread awareness about
“Making Money More Productive”

Hornmerchant
TM
Fixed Deposits
V/s
Debt Mutual Funds
(How Debt Mutual Funds Offer You Better Returns
and More Advantages than a Fixed Deposit)

Hornmerchant
TM
Introduction to the Concept of Mutual Fund
Many people have wrong understanding about Mutual Funds:
They think all Mutual Funds invest in Equity Share Market or Mutual
Funds are Equity Share Market Related Products and hence “Risky”.
But the fact is that, mutual fund is just
“Medium” of “Method” of investment .
Through this medium of ‘Mutual Funds’ investors can indirectly
invest in different ‘Asset Classes’ – Debt Securities (Fixed Interest
Bearing Instruments such as FD’s and Govt Bonds), Gold, Real Estate
and also Equity Market.

Hornmerchant
TM
Depending on in what asset a mutual fund invest in to
a mutual fund becomes:
• Equity Mutual Fund: If it invests in ‘Equity Shares’
• Debt Mutual Fund: If it invests in ‘Fixed Interest Bearing
Instruments’ or Debt Instruments
• Gold Mutual Fund: If it invests in ‘Gold’
• Hybrid (Balanced) Mutual Fund: If it invests in Equity & Debt or
Equity, Debt & Gold, or Equity & Gold
Introduction to the Concept of Mutual Fund Contd…

Hornmerchant
TM
A mutual fund provides platform to the ‘like-minded’ investors to unite / come
together to pool their money and together invest in the kind and
type of asset class they are comfortable with.
As we learned in our childhood, “In UNITY is the STRENGTH”
For Example:
A risk averse person would choose to invest in Fixed Deposits which ensures him /
her, though little, a fixed and assured return in the form of ‘Interest’. Alternatively
he / she can take Debt Mutual Fund route which would mostly earn better
returns than his / her direct, individual investment and even if the Debt Mutual
Funds are at par with FD returns, if you consider the post-tax returns from
these two alternatives, such Debt Mutual fund would yield you
more than corresponding FD.
Introduction to the Concept of Mutual Fund Contd…

Hornmerchant
TM
What are the advantages of Mutual Funds (What are the ‘Strengths’ of ‘Unity’)?
There are so many lucrative opportunities out there in the Financial / Investment
Market.
But ensuring the gains with high degree of possibility involves:
• Fundamental and Technical Research (Economy, Sector, Company, Market
Dynamics etc)
• Identify and Exploit Opportunities: What to buy / Sell?
• Continuous Tracking of Investments
• Timing: When to buy / sell?
That’s really a huge and complex task; definitely requires a bunch (team) of experts!
Isn’t it good to have such a Team of Qualified and Experienced Investment
Managers working hard to grow your money?! No doubt, it is great; but can a any
single person can afford such thing?
Well, Mutual Fund makes Professional Management of the
Investments damn affordable!

Hornmerchant
TM
What are the advantages of Mutual Funds (What are the ‘Strengths’ of ‘Unity’)?
“Not putting all the eggs in one basket” is the lesson we learned in our childhood.
That’s very simple way of telling what the “Diversification” means.
But with the limited amount of money one has, there is not enough room to
diversify well. Individually, an investor may be able to own stocks / Bonds / FD’s of a
few companies. Many a times a retail investor will not have opportunity to invest in
few lucrative avenues due to the ‘huge ticket sizes’ (Min. investment threshold).
Mutual Fund makes it possible to diversify your money
across large no. of investments.
Mutual Fund offers other benefits like
• Economy of Scale
• Liquidity and
• Better Tax Treatment (higher Post Tax Returns)
Contd…

Hornmerchant
TM
Bank FD’s are considered to be safe heavens for investments and
believed to have ‘NO’ risk. Since our subject is about alternatives
to FD, let’s understand the ‘Risk’ quickly.
1. When we talk about ‘Risk’ attached to a Fixed Income instrument, there are two kinds of risk: Income (Interest) Risk and Credit
Risk. Income (Interest) Risk is the possibility of non-payment / defaulting of the interest by the issuer of the security. Credit Risk is
the possibility of defaulting to repay the capital.
2. There is no single instrument that is “ABSOLUTELY” risk free. ‘Risk’ is just relative. Within the given set of instruments one will be
safer than the others.
3. It’s a myth that Bank Fixed Deposits provide ‘Absolute’ safety about capital protection.
But the reality is Bank FD’s capital protection is guaranteed by Deposit Insurance and Credit Guarantee Corporation (DICGC) of India
to the extent of Rs. 1 lakh only!
However, we believe, in India the possibility of Banks defaulting is very very rare.
4. Many people are not aware that, not only banks but other private and public companies float / issue Fixed Deposits and other Fixed
Income (Fixed Interest Bearing) Securitas. Obviously the ‘Reliability’ of these depends on the issuing company’s reputation and
‘Creditworthiness’. To asses these things there are independent credit rating agencies who rate these securities as assign the rating
typically on the scale of ‘AAA’ (Highest) to ‘D’ (Lowest). An ‘AAA’ security is comparable to Bank FD in terms of ‘Safety’ or ‘Risk-
freeness’.
5. The Govt Securities (G-Sec’s, T-Bills, State Loans etc) are backed by Sovereign Guarantee on both the Capital and the Interest. They
are in fact the highest security instruments… However, that’s true in Indian Context!
6. The way different securities and issuing institutions are rated by the Independent Rating Agencies, same way such agencies even
rate countries also! Hence in global context, India as a country will also have credit rating (presently ‘BBB’)!

Hornmerchant
TM
Let’s see specifically about Debt Mutual Funds which are alternatives to FD’s
Debt Mutual Funds have further Sub-categories. For limiting our focus to Debt MF’s comparable to
Fixed Deposits we will look at Debt-Income Mutual Funds, Short & Medium Term Debt Funds only.
So, in what kind of securities these Funds Invest?
Income Funds invest in Govt Securities (Bonds) issued by Central and State Govt, Bonds Issued by
Large and Reputed Corporations, Banks & Financial Institutions which usually be have ‘AAA’ or ‘AA’
rating. Short and Medium Term Funds also invest in similar securities where the maturity period (or
residual maturity period) of the securities is less than about 3 years.
What kind of risks involved in this kind of Fixed Income (Fixed Interest Bearing) securities?
These securities are prone to ‘interest rate’ risk. Though G-Sec’s are very safe in themselves, their
current market price depends on the prevailing interest rate in the market. Well, let me explain.
Let’s take an example: When interest prevailing in the market is 10%, (i.e., the rate of interest that
most of the bankers and Lenders are giving) Govt issues Rs. 100 Face Value Security with 10% interest
rate (coupon) and the duration / term of the security is 5 years. That means, Govt will refund the
capital Rs. 100 after 5 years (on maturity). Until then it promises to pay an interest of Rs. 5 every year
@ 10%. If you need your capital back earlier to the maturity, then you have to sell this security to
some one else. As long the interest rate in the market is at 10% you would be able to sell your security
at Rs. 100 (Face Value). That way buyer of the security would earn the same interest income (Rs. 10).
Cond…

Hornmerchant
TM
Let’s see specifically about Debt Mutual Funds which are alternatives to FD’s
Cond…
But if, after an year of issue, the interest rate in the market will increase to 12% , and if you want to
sell this security, no buyer would buy it at face value. Because by investing same money elsewhere he
would earn 12% return where as you security would earn only 10%. Hence the buyer would like to
buy your security at discounted price, i.e at ~ Rs. 83.5/- which would earn him Rs. 10 @ 12%. This way
the “Market Price” of your security came down from Rs. 100 to Rs. 83.5. Exactly opposite will happen
if the interest rate in market fall. That means the market price of your security would increase. Hence
the market price of your Debt security is inversely proportional to the interest rate changes.
How Dynamic / Flexi Bond funds work?
In the whole of debt market different debt instruments are advantageous at different points of time
and circumstances. The fund manager actively moves / allocates the money from one to other type of
security to take advantage of any given scenario.
How Short / Medium Term (Accrual) Funds work?
These funds mainly gain by interest accrual from the securities held.

Hornmerchant
TM
OK, Now let’s Compare Fixed Deposit V/s Debt Mutual Fund
Investment Horizon: 3+ Years
High (5/5) High (5/5)Safety (Security)
PSU Bank Fixed Deposit Short /Medium Term Debt MFCriteria
Capital Preservation
(over given investment Horizon)
Annualized Returns
(Most Likely)
Post-Tax Returns
Volatility
Liquidity
100% Sure (5/5) 90-95% Sure (4/5)
X (4/5) X +/- 1% (4/5)
X – 10% to 30% (3/5) X or X – 2% to 3% (5/5)
Nil (5/5) Low (4/5)
High (4/5); Penal Charges
Applicable
High (5/5); No Penal Charges for
Early Exit / Withdrawal (After 1 Yr)
TDS Deducted on Accrued Interest No TDS

Hornmerchant
TM
Well, enough of theory, let’s look at the facts & figures!
(Let’s see how ‘Before Tax’ returns look)
Sl. No. /
No. of
Years
YYYY
(Beginning of
the Year)
Bank FD
Floating
Rate % (at
higher side)
FD Returns
(1 Year)
FD Returns
(3 Year)
FD Returns
(5 Year)
Debt MF
1 Year
Returns %
(Avg of
Top 60%
of all
Funds in
category)
Debt
(Income) MF
CAGR
(1 Year)
Debt
(Income)
MF 3 Year
Returns %
(Avg of
Top 60%
of all
Funds in
category)
Debt
(Income) MF
CAGR
(3 Year)
Debt
(Income) MF
5 Year
Returns %
(Avg of Top
60% of all
Funds in
category)
Debt
(Income) MF
CAGR
(5 Year)
Invested on
01-Jan-2008
Invested on
01-Jan-2008
1 2008 8.75
Invested on
01-Jan-2012
Invested on
01-Jan-2010
1,000
Invested on
01-Jan-2012
Invested on
01-Jan-2010
8.7 1,000
2 2009 8 1,088
3 2010 9.5
1,000
1,175
1,000
4 2011 9 1,095 1,286
9.0
5 2012 9.25
1,000
1,194 1,402
1,000
6 2013 9 1,093 1,304 1,531 10.50 1,105 1,295 1,518
In the above table, for giving the advantage to the FD, the returns from Debt MF’s are considered
conservatively. Maturity Amount of Rs. 1,000 invested in 3 Year FD would be 1,304 and that of 5 year
would be 1,531. Whereas, the not-so-good performing Debt Income Fund should have compounded
that Rs. 1,000 to 1,295 in 3 years and Rs. 1,518 in 5 years.

Hornmerchant
TM
Conclusion:
Selected suitably, debt mutual funds usually deliver, to put it conservatively,
deliver 1 Percentage Point (extra 1%) returns over the FD of the same tenure.
With the help of a good Mutual Fund Advisor you can really make more out of
your Debt MF’s.
Even if it is considered that, FD’s and Debt MF’s deliver more or less, same before
tax returns over a period of time, the post tax returns from debt MF’s will be far
higher than Post-Tax FD returns.
HOW?
Let’s see than in next slide…

Hornmerchant
TM
Shall we do some more maths?! (Post Tax Returns)
Fixed Deposit
Debt Mutual Fund / FMP
Growth
Option
Dividend
Option
Amount Invested 10,00,000 10,00,000 10,00,000
Tenure (Years) 3 3 3
Expected Gross Returns (%) 8.00% 8.00% 8.00%
Interest Income / Capital Gain 2,59,712 2,59,712 2,59,712
Before Tax Maturity Amount 12,59,712 12,59,712 12,59,712
Tax on Interest + Cess @ 10.3% 26,750
Post Tax (10.3%) Interest Income 12,32,962
Dividend Distribution Tax (DDT) @ 27.038% 70,221
Post DDT Maturity Amount 11,89,491
Rate of inflation (%) 6.00%
Indexed Principal Amount 11,91,016
Post-Indexation Capital Gain 68,696
Long Term Capital Gain Tax @ 20.6% 14,151
Net Maturity Amount After Tax 12,45,561
Conclusion
For all Income tax bracket
people, Maximum Tax Saving by
choosing Debt Mutual Fund with
Growth option thanks to
indexation benefit
For people falling in 10% or 20%
income tax bracket, FD's yield
better than Debt MF with
Dividend option
For people falling in 30% income
tax bracket, even Debt MF with
dividend option yield slightly
higher than FD's
Again, for all income tax
categories, Debt MF's with
Growth option yield highest;
hence the best option for all.

Hornmerchant
TM
So, it is clear that, depending on what tax bracket you fall in, you may be falling in, on
post-tax returns basis, you will make far higher returns from Debt Mutual Fund
(Growth) option
12,32,962
12,06,211
11,79,461
12,45,561
Post-Tax FD Returns for
10% Tax Payer
20% Tax Payer
30% Tax Payer
Post-Tax Debt MF Returns for ALL
This illustration so far is made with the assumption that someone is comparing
‘Cumulative’ FD returns with Debt MF Returns.
However, what if some one is looking for interest payout from Fixed Deposit?
Say, retired person is trying to make provision for his monthly pension / payout by
keeping his retirement corpus in a fixed deposit.

Hornmerchant
TM
Well, the debt mutual fund still be a better option, even when someone opts for
regular cash flows / interest payout from the invested amount.
To examine this, lets compare the cash flows from an investment of ₹ 25 Lac in a fixed deposit
paying interest @ 8%. Let’s assume the investor is falling in 20% Tax Bracket (Income Tax Payer /
Assessee @ 20%).
So, on this deposit, he / she would get a monthly gross interest of ₹ 16,667 which is taxable @ 20%
and hence his / her net, post tax payout would be ₹ 13,233/-. So for the next 10 Years (for example)
the investor would get flat ₹ 13,233/- per month and balance of the FD or maturity value will be ₹
25 Lac
Whereas, if the same money is invested in a Debt MF and gross annualized returns from Debt MF
are also considered @ 8%, then he / she will get monthly MORE THAN ₹ 14,300/- per month for the
next 10 years and balance of the fund / maturity value will be about ₹ 28 Lac.
Alternatively, if it is rate of returns form Debt MF are considered at usual performance rates @ 9%
(i.e., 1 Percentage Point more than FD rates), then from the same 25 Lac corpus, inflation adjusted
payout’s can be made out of debt MF. That means, every year monthly Payout will increase by 6%
(rate of inflation). That means, 1st year monthly payment amount would be about ₹15,000, which
increases every year by 6% to become ₹25,000/- per month in the 10th year.
Refer the next slides for detailed illustration…

Hornmerchant
TM
Cash Flow (Interest Payout / Pension) Illustration (by Investing in Bank FD)
Initial Investment (For Monthly Payout) 25,00,000 Monthly Payout Amt from Bank FD 16,667
Average Expected Rate of Return 8.0%
Applicable Income Tax Rate 20.6%
Rate of Inflation (for Indexation) 6.0%
Year No.
End of
Month
No.
Monthly
Gross
Payout /
Withdrwal
Tax on
Monthly
Payout
Net / Post-Tax
Income for the
Month
Closing
Balance of
Principal
1 1 16,667 3,433 13,233 25,00,000
2 13 16,667 3,433 13,233 25,00,000
3 25 16,667 3,433 13,233 25,00,000
4 37 16,667 3,433 13,233 25,00,000
5 49 16,667 3,433 13,233 25,00,000
6 61 16,667 3,433 13,233 25,00,000
7 73 16,667 3,433 13,233 25,00,000
8 85 16,667 3,433 13,233 25,00,000
9 97 16,667 3,433 13,233 25,00,000
10 109 16,667 3,433 13,233 25,00,000
Find this Detailed Spread Sheet @
http://bit.ly/Alt2FD4Annuity
Try your own set of numbers!

Hornmerchant
TM
Cash Flow (SWP / Pension) Illustration (by Investing in Debt Funds )
Initial Invesment (For Monthly
Payout)
25,00,000 Monthly Payout Amt from Scheme-A 15,000
Rate of Increase in Payout /
withdrwal every year
0.0% Scheme Type (Equity Exposure) 0% Equity
Year
No.
End of
Month
No.
Monthly
Gross
Payout /
Withdraw
al
Balance of
Scheme
just before
Monthly
Payout
Balance of
Capital
Gain just
before
Monthly
Payout
Payout /
Withdra
wal
from
Principa
l's
Portion
Payout /
Withdrwa
l From
Gains
STCG on
Monthly
Payout
STCG
Tax on
Monthly
Payout
Indexed
Value of
the
Amount
being
Withdrawn
LTCG on
Monthly
Payout
LTCG
Tax
Total
Tax
Net /
Post-Tax
Income
for the
Month
Closing
Balance of
Principal
Closing
Balance
of
Accumula
ted Gains
Closing
Balance of
Total
Corpus
1 1 15,000 25,16,667 16,667 14,901 99 99 20 NA 0 0 20 14,980 24,85,099 16,567 25,01,667
2 13 15,000 25,37,555 2,09,992 13,759 1,241 1,241 256 NA 0 0 256 14,744 23,13,805 2,08,750 25,22,555
3 25 15,000 25,60,177 3,91,835 12,704 2,296 2,296 473 NA 0 0 473 14,527 21,55,638 3,89,539 25,45,177
4 37 15,000 25,84,676 5,63,353 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 5,48,353 25,69,676
5 49 15,000 26,11,209 5,89,886 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 5,74,886 25,96,209
6 61 15,000 26,39,945 6,18,622 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 6,03,622 26,24,945
7 73 15,000 26,71,065 6,49,742 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 6,34,742 26,56,065
8 85 15,000 27,04,768 6,83,445 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 6,68,445 26,89,768
9 97 15,000 27,41,268 7,19,945 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 7,04,945 27,26,268
10 109 15,000 27,80,798 7,59,476 0 15,000 0 0 14,160 840 168 168 14,832 20,21,323 7,44,476 27,65,798
Find this Detailed Spread Sheet @ http://bit.ly/Alt2FD4Annuity

Hornmerchant
TM
Cash Flow (SWP / Pension) Illustration (by Investing in Debt Funds & MIP's)
With Yearly Increase in the Monthly Payout
Initial Investment (For Monthly
Payout)
25,00,000
Monthly Payout Amt from
Scheme-B (at Start)
15,000
Rate of Increase in Payout /
withdrwal every year
6.0%
Scheme Type (Equity
Exposure)
Up to 10%
Equity
Year
No.
End of
Month
No.
Monthly
Gross
Payout /
Withdra
wal
Balance of
Scheme just
before
Monthly
Payout
Balance of
Capital Gain
just before
Monthly
Payout
Payout /
Withdra
wal from
Principal'
s Portion
Payout
/
Withdr
wal
From
Gains
STCG
on
Monthl
y
Payout
STCG Tax
on
Monthly
Payout
Indexed
Value of
the
Amount
being
Withdra
wn
LTCG on
Monthly
Payout
LTCG
Tax
Total
Tax
Net /
Post-Tax
Income
for the
Month
Closing
Balance of
Principal
Closing
Balance
of
Accumula
ted Gains
Closing
Balance of
Total Corpus
1 1 15,000 25,18,750 18,750 14,888 112 112 23 NA 0 0 23 14,977 24,85,112 18,638 25,03,750
2 13 15,900 25,66,005 2,37,529 14,428 1,472 1,472 303 NA 0 0 303 15,597 23,14,048 2,36,057 25,50,105
3 25 16,854 26,06,352 4,44,098 13,982 2,872 2,872 592 NA 0 0 592 16,262 21,48,272 4,41,226 25,89,498
4 37 17,865 26,38,462 6,37,293 0 17,865 0 0 16,392 1,473 295 295 17,571 20,01,169 6,19,428 26,20,597
5 49 18,937 26,60,841 6,59,672 0 18,937 0 0 17,376 1,561 312 312 18,625 20,01,169 6,40,735 26,41,904
6 61 20,073 26,71,812 6,70,642 0 20,073 0 0 18,418 1,655 331 331 19,742 20,01,169 6,50,569 26,51,738
7 73 21,278 26,69,493 6,68,324 0 21,278 0 0 19,523 1,754 351 351 20,927 20,01,169 6,47,046 26,48,216
8 85 22,554 26,51,781 6,50,611 0 22,554 0 0 20,695 1,860 372 372 22,183 20,01,169 6,28,057 26,29,226
9 97 23,908 26,16,318 6,15,149 0 23,908 0 0 21,936 1,971 394 394 23,513 20,01,169 5,91,241 25,92,411
10 109 25,342 25,60,477 5,59,307 0 25,342 0 0 23,253 2,090 418 418 24,924 20,01,169 5,33,965 25,35,134
Find this Detailed Spread Sheet @ http://bit.ly/Alt2FD4Annuity

Hornmerchant
TM
• So, by now you are fairly aware, whatever your requirement
is, there is a better alternative is there than what you know
conventionally.
• Don’t get bogged down by those numbers, tables and
spread sheets… they are just to give you evidence for
showing how Debt Oriented MF’s are better than Fixed
Deposits. You need not to fully understand those
calculations and taxation concepts to make your money
more productive.
• Please contact a learned mutual fund advisor for more
clarifications and help.

Fixed Deposits Vs Debt Mutual Fund

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