Freefincal Q & A: How to compare returns from a FD and a MF?

Published: June 3, 2017 at 10:41 am

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Each week I try and answer generic questions from readers. Here is this weeks edition. You can use the form below to ask your question and I will respond next week.

Some news:

1 If you have ordered GameChanger (my second book), you will receive in the next few days. It will be available at Amazon probably by tomorrow as hardcopy and kindle.

2 You Can Be Rich Too With Goal Based Investing is now 30% OFF at Amazon (hardcover ₹ 278)Opens in a new window and at Flipkart Opens in a new window. The Kindle editionOpens in a new window(you can use the free app to read it). is available for only ₹90.74.  The Google Play Store editionOpens in a new window (read on PC/Tab/mobile) is also available for the same price. Grab them before the offer ends!

Vinay: Hello sir, My MOM is due to retire next month and will be receiving indexed pension along with 20-30 lakhs of. Kindly suggest minimalist mf portfolio for her.

Pattu: I don’t do that, but can suggest that you can get professional advice for about 10-12K if you consult one of these SEBI registered fee-only financial planners.

Sagar: Hello Pattu Sir, and Subra Sir:) Many Thanks for your all Blog posts , Calculators and the book. I just finished reading it and now as you tweeted today important part I have to implement it. I have downloaded Automated-mf-portfolio-financial-goal-tracker-Apr-2016 tracker. I am trying to add my holdings in the tracker but Nothing happens Do you have any idea what can be problem in this case ? Do i have to activate Macros or something ? Regards Sagar

Pattu: Yes, macros have to be active. I will post a video about how to use this and track a portfolio and financial goals.

Aniket Bhadane: How to compare returns from FD and MF? Example: I have Rs. 100000 to invest. I can invest this one time in a Fixed Deposit (compounded each year) or in a Direct Mutual Fund in form of SIP investing 5000 each month for 20 months. Whichever I choose, I keep the investment for 5 years. How to compare returns from FD and MF at the end of 5 years? (Please consider a conservative return rates as per your experience) I read your articles about CAGR, XIRR. But it did not give a clear idea how to compare these two instruments?

Pattu: Comparisons are based on past data. You need to consider the range of 5-year returns observed in an index like the Nifty. This gives you an idea of how much returns can fluctuate. Here is such a study: Equity investing: How to define ‘long-term’ and ‘short-term’  For example. If I say, I expect 12% over 5Y, I must qualify(or quantify) that expectation with a spread: 12% +/-12% (!!).

That is how risk is stated. There is a difference between 12% +/- 2% and 12% +/-12% (this is what I would expect over 5Y).

Please also consider studying:

What Return Can I Expect From Equity Over the Long term? Part 1

What Return Can I Expect From Equity Over the Long term? Part 2

Bottomline: Apples & Oranges can be compared if we use the right yardstick (risk + return and not return alone)

Comparing FD and MF
Credit: ericaxel

DILIP: Are Direct MF plans are expensive? I have seen one article as below. It is talking about expense ratios (are increasing) and basis points(bps) . Could you please throw more light on both the points highlighted into the article? In addition, do you find any additional cost? Is there any comparative analysis tool exist to both of issues highlighted between Regular and Direct plan schemes? For long-term investors, just as returns compound, annual costs also compound, so it is also worth to discuss and develop tool to visualize the overall impact on portfolio return. Thanks.

Pattu: I do not read anything from Livemint, ET Wealth, moneylife, ValueResearch, Business Standard, MorningStar ….. because they are of no use and often lacks the right perspective. This article (which I was forced to read because a friend showed it to me) is yet another example of this. There is no logic on Earth that can justify the use of regular plans over direct plancs and I would suggest that you ignore this.

I already have Illustrations: Direct Mutual Funds vs. Regular Mutual Funds

and annual reports: Direct Mutual Fund vs. Regular Mutual Fund: 2017 Performance Report and Expense ratio calculators.

Amit Sharma: 
Hi, great article. Unfortunately I am a victim of low cibil score and was looking measures to improve it as I also wanted to avail a personal loan to renovate my house. Please suggest me as the banks keep cibil score as the fundamental factor in giving loans.

Pattu: It is nothing more than common sense. (1) Clear all loans. (2) Do not use the card up to the credit limit – just 30-40% use for a few month and a little more after that. It will take many months before it will improve.

CIBIL is not responsible for a low CIBIL score – we are.

Ask Questions with this form

And I will respond to them next weekend. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.

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You Can Be Rich Too With Goal Based Investing is now 30% OFF at Amazon (hardcover ₹ 278) and at Flipkart. The Kindle edition(you can use the free app to read it). is available for only ₹90.74.  The Google Play Store edition (read on PC/Tab/mobile) is also available for the same price. Grab them before the offer ends!

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Amazon Hardcover Rs. 278. 30% OFF

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About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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