A few days ago Subra called me to discuss a calculator idea: a comparison between a lumpsum investment made in a bank fixed deposit and a debt fund, like a income fund, over a period of several years.
Interest from a bank FD has to be declared each year and will be taxed according to slab. Whereas taxation is deferred until redemption for a debt fund and is either a flat 10% or 20% after inflating the initial investment using the cost inflation index. The 20% option typically implies lower tax and if inflation is high there could be capital losses instead of gains!
This key difference between a FD and a debt fund implies that more money is available for compounding each year. So over a long period of time there can be big difference in the corpus. In fact a debt returning 7.5% can still outperform a FD returning 10%! Of course there is more risk associated with a debt fund than an FD but over a long period of time (say 10 years) this risk should be minimal.
Here is the article by Subra which explains this with an example:
Here is the calculator based on this idea to compare returns of a FD and a debt fund. The options are fairly straightforward. Play around with it and let me know what you think.
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