If you think you’re saving well enough by putting your money in the bank’s savings account, you’re mildly, if not wildly, mistaken. The money in your bank is actually making you a loss. Sure, the money does earn interest, but the purchasing power of your money actually decreases over time.
Savings account losses
- The Consumer Price Index (CPI), a measure of retail inflation, is 3.6% higher than the previous year’s figure
- This means an average person would have to spend 3.6% more money now to buy the same amount of goods and services one bought a year ago
- With most banks offering an interest rate of 3.5–4% per year, your money’s actual buying power is either reducing, or barely remaining above the mark
- Added to this, any interest above ten thousand rupees is added to your income and is taxed at the prevailing income tax rate. If you earn between rupees 5–10 lakh per annum, that’s 20% income interest on your savings income. Taking 20% off a paltry 3.5–4% savings interest leaves one with 2.8–3.2%, ensuring you invariably make a loss
- Even if you fall under the 2.5–5 LPA income slab, effective gains after taxes would be between 2.8–3.8%, depending on your final income after adding savings interest. Also, retail inflation rates are at their lowest this year with the average retail inflation rate over the past five years at 6.75%
Fixed/Recurring deposit losses
Think you can beat inflation with a fixed or recurring deposit? You’d still lose money. Or at best, barely beat inflation as most banks offer a 6–7% interest rate on deposits. The five year average retail inflation rate is 6.75%. Further, you can’t withdraw your money at will without forfeiting interest or earning a lower interest in addition to paying indemnity of 0.5–1% after a lengthy process.
Again, any interest income beyond ₹10,000 is taxed as income, just like a regular savings account. Now that you’ve seen how your wealth is squandered with bank deposits, here’s what you can do to grow your wealth in the true sense of the term.
Growing wealth with debt funds
- A debt fund may be long term/short term or ultra-short term investment, also called liquid debt
- These are low risk investments. Returns are more or less assured, so you can sit back and relax
- Liquid debt carries very low risk, and most offer return 7–8% returns. You can withdraw money any time, and some fund houses even offer instant transfer of money
- Though a low risk investment, long term debt funds are slightly volatile. While returns are usually consistent, they could vary depending on market conditions. The return is usually between 10–15%
- Interest from debt funds are classed as long term capital gains if held for more than 3 years and are charged a tax rate of 20% after indexation, a process that takes retail inflation into account to calculate effective profit
- Any investment redeemed within 3 years is added to income and is taxed at prevailing income tax rates
Thus, it makes much more sense to invest money in liquid debt or in short/long term debt as opposed. The returns could easily be twice as much as that of bank deposits if you invest in debt funds.
Investing in equity for greater returns
Though investing in equity directly or in equity oriented mutual funds carries some risk, you can mitigate risks with diversification and make more or less consistent profits. Equity funds generally offer returns between 15–20% and a well performing fund could offer even higher returns. Hybrid funds, a category of mutual funds that balance equity and debt investments, offer decent returns at a risk intermediate between equity and debt investments.
Short-term Capital Gains stay taxed at 15%, while you pay Long-Term Capital Gains on amounts greater than ₹1,00,000 in a financial year. The catch here is that no taxes need to be paid on gains made from these funds if you hold the investment beyond a year and if the gains are till ₹ 1,00,000 for a financial year. So all your returns are yours to keep. Take that, inflation!
Now that you know how your money in the bank actually diminishes over time and how to beat inflation, make your money work as hard for you as you work for it.
You can invest in Equity, Debt, ELSS and other Mutual Funds on the MobiKwik app for no fee and no commissions now.