The omission of Section 80L in the recent Budget has necessitated a review of investment avenues like fixed deposits.
Deductions from income under the erstwhile Section 80L contributed to the attractiveness of fixed deposits. However, in the new tax regime they could be found wanting on the return parameter.
Let us take an example to better understand the same. Suppose an investor invests Rs 100,000 in an 'AAA' rated fixed deposit for a 1-year period at 5.75%. Under the earlier tax regime, the interest income (Rs 5,750) would have qualified for a deduction (Section 80L) and not added to the assessee's tax liability (up to a maximum of Rs 12,000 per year). But under the new tax regime, the absence of any deduction enhances the investor's tax liability; the effective post-tax return would be as follows:
Fixed Deposits: Uncovered sans Section 80L
| Rate of Interest | Tax bracket | Post-tax return |
| 5.75% | 10% | 5.18% |
| 5.75% | 20% | 4.60% |
| 5.75% | 30% | 4.03% |
Clearly the returns from a conventional fixed deposit investment are modest at best. So what recourse do investors have to tide over this scenario?
The solution lies in evaluating the reason for getting invested in fixed deposits. If you are a risk-averse investor for whom capital preservation and assured returns are of high priority, fixed deposits are probably best suited for your risk-appetite.
However you can explore variants like Post Office Time Deposits which offer attractive returns at high safety levels.
Another smart move would be to invest in short-tenured deposits; you can continue to roll over the deposit to match your investment horizon and concurrently also benefit from a rise in rates.
You can also consider investing in variable rate deposits that offer you the opportunity to earn a higher interest rate in case of a rising rate scenario
Click here to know more about variable rate deposits
If you have used fixed deposits for parking surplus funds, short-term floating rate funds can be considered for the same purpose going forward. Apart from offering high safety levels, these funds also offer investors the opportunity to benefit from uptick in interest rates.
Short-term floating rate funds score over fixed deposits on the liquidity front; they will especially appeal to investors who wish to wait on the sidelines till better investment opportunities emerge.
On the flip side, the high minimum investment amount could act as a deterrent for retail investors.
Leading short-term floating rate funds
| Short-term Floating Rate Funds | NAV (Rs) | 1-Mth | 6-Mth | 1-Yr | Incep. |
| JM FLOATER FUND STP | 10.91 | 0.44% | 2.62% | 5.02% | 5.05% |
| UTI - FLOATING RATE STP | 10.79 | 0.43% | 2.59% | 4.99% | 4.93% |
| KOTAK FLOATER STP | 10.88 | 0.44% | 2.59% | 4.90% | 5.07% |
| TEMPLETON FLOAT STP | 11.96 | 0.42% | 2.52% | 4.89% | 5.83% |
| HDFC FLOATING STP | 11.13 | 0.43% | 2.49% | 4.86% | 4.92% |
Alternatively, if you invest in fixed deposits simply because you have conventionally done so and the decision is unrelated to your risk appetite, then it is time to adopt a more proactive and pragmatic investment approach.
Minus the tax benefits, there is a need to assess the utility of fixed deposits in your portfolio. If your risk appetite permits taking on higher risks, a transition to market-linked instruments like Monthly Income Plans can be considered.
Leading monthly income plans
| Monthly Income Plans | NAV (Rs) | 1-Mth | 6-Mth | 1-Yr | Incep. |
| PRU ICICI INCOME MULT. | 10.89 | 0.10% | 6.58% | 9.09% | 9.03% |
| FT INDIA MIP | 17.22 | 0.15% | 5.48% | 8.45% | 12.91% |
| HDFC MIP LTP | 11.28 | 0.10% | 5.98% | 8.29% | 8.41% |
| HDFC MIP STP | 11.11 | 0.12% | 5.41% | 7.81% | 9.50% |
| DEUTSCHE MIP | 10.81 | 0.12% | 5.11% | 7.41% | 9.19% |
MIPs would typically rank higher than fixed deposits on the risk-return paradigm and hence be equipped to offer better returns vis-à-vis fixed deposits.
MIPs score over fixed deposits on the tax-efficiency front as well since dividends are tax-free in the hands of investors.
A word of caution is warranted here; the attractive returns offered by MIPs should not be seen as a blanket recommendation to discard fixed deposits. Adhering to one's risk profile is imperative at all times.
Our advice to investors is:
1. Revisit the reason why you invested in fixed deposits in the first place. If the investment decision was in tune with your risk appetite, don't alter the same. However, select short-term deposits or variable rate deposits going forward depending on your investment objective.
2. Consider the possibility of investing in short-term floating rate funds to gainfully utilise surplus funds.
3. If you can take on higher risk, consider allocating a proportionate amount of your portfolio to market-linked avenues like MIPs.
4. Ensure that your asset allocation is in tune with your risk profile at all times. While necessary adjustments need to be made to one's portfolio as per the changing 'investment climate', the latter is no excuse for discarding one's asset allocation.
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