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Stop Keeping Money Idle – Investment Ideas – Axis Direct
AxisDirect-O-Nomics
May 07, 2018 | Source: Value Research
Stop Idling Your Earnings
You go to a great deal of hardship to earn your monthly pay cheque. Then why let your money sit idle in a savings bank account, earning a miserable four per cent? Make it a habit to sweep your excess money into the growth option of good liquid mutual funds every month. After all, you can withdraw it anytime you need. Over the long term, the opportunity cost of letting your salary lie in your savings account can be quite steep.
With the long-term inflation rate in India at 5 to 6 per cent, you stand to lose 1 to 2 per cent to inflation every year if you stick to a 4 per cent savings account. By putting that money to work in a liquid fund, you can earn a 2 to 3 per cent real return over inflation. In fact, in the last ten years, despite the ups and downs of rate cycles, liquid funds have delivered a CAGR of 7.8 per cent, almost double the return on your savings account.
If you can hang on for three years, liquid funds are more tax efficient than savings accounts, too. Under Section 80 TTA of the Income Tax Act, up to Rs 10,000 in annual interest that you earn from your savings account is exempt from income tax. The returns from liquid funds are taxable. But given the indexation benefits on the gains after three years, even if your fund earns you just 7 per cent per annum, your net returns will be far higher than those from a savings account.
Take the live example of a person who parks Rs 2 lakh in a savings bank account for ten years. At a 4 per cent annual interest, his kitty will grow to Rs 2.96 lakh at the end of ten years, with the entire returns being tax-exempt. With the growth option of a liquid fund earning 7 per cent, the same Rs 2 lakh will grow to Rs 3.93 lakh. Assuming inflation at 5 per cent over the ten-year period, only the net gains over and above this (Rs 67,651) will get taxed at 20 per cent (the long-term capital-gains-tax rate for liquid funds). After deducting the tax of Rs 13,530, the investor is still left with Rs 3.79 lakh - a nice 28 per cent bonus over the savings account!
