Hey All,
Happy Diwali Guys,
Recently I saw a post related to Financial which induced my expectation saying, the saving scheme from Kerala provides a return of more than 8%. I was under the assumption investing in that fund will for sure, beat the inflation of 6-7% and I will be on the greener side. I hope most of us agree with me on this part.
Reality seems different when I looked further closer at it and as per my calculation we might end up on the losing side as well. So how to defend ourselves, that should or will be our next question right, I have got an answer for it too but this might not be apt or exact as we have multiple choices in front of us.
Let us dive and try to understand the scenario here guys. we can get more details about the above saving scheme from this.
URL http://www.ktdfc.kerala.gov.in/deposites/interest-rates.
Let us assume we are in a 20% tax slab or 30% tax slab( all these confusions are only for salaried employees). And we are investing in this scheme for 5 years with a return of 8%. before proceeding further read this below point from their site.
All figures shown above are for narrative purposes only, the actual figures may slightly vary depending on the date
of deposit, the applicability of Tax on interest (TDS) etc
Now let us assume we are investing one lakh (100000) in this scheme and what would be our return at the end of 5 years. Basic taxation rule for FD returns: Return will be added to our salary and taxes will be charged based on tax slab. as we assumed we are in 20% tax slab for the return of INR48,595 we need to pay 20% of tax this is INR9719 and at the end.
we would have got only 48595-9719 = 38876. our overall return reduced from 48% to 38% isn't if we are doing this again we might be making a mistake we promised to get only 8% from our investment but in the end, after doing all these calculations we ended up making only 6.65 to 6.70% on our initial investment.
I think now it should have started to ring a bell right??? yes, if our inflation stayed below our return % then we are safe that's like the value of our money neither increased nor decreased. but we ended up spending 5 years retaining the value of our hard-earned money.
In other cases, if inflation is on the higher end then we are on the losing side for sure, I hope this can be understood by doing basic math.
OKAY, we have understood that we might end up on the losing side, now comes the important part of how to defend ourselves, that should or will be our next question right... if it is our next question, in the section of Mutual Fund we have a fund called arbitrage funds. how we can be sure that by investing in these funds we won't end up on the losing side.
As we discussed in the above point the twist always comes near or at the climax in the taxation part. As we are kept invested for 5 years in FD we should consider investing the same amount for the same time in an arbitrage fund.
How arbitrage funds make a profit here is a simple example who has knowledge of FNO scripts can understand it better. because of price differences in the future market and cash market.
Things we should know before investing in these
1. Their Asset Allocation.
2. Time period of investment.
3. STCG or LTCG.
4. Exit load (usually exit loads are not heavy on these kinds of funds but we need to keep an eye on that).
5. Taxation part.(https://cleartax.in/s/arbitrage-funds)
Again I want to clarify that I am not against FDs I just discuss the pros and cons of FD so everyone can have their own analysis like me and equip which suits us perfectly.
I wanted to thank the person who inspired me to look into these kinds of small things which matter a lot. Most of my friends know him and might know him as Pattu an author of the FreeFincal blog.
More about him is in the below URL.
Detail: https://freefincal.com/pattabiraman/
his Blog: https://freefincal.com/
Stay tuned for more blogs which are in draft status.
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