I am earning pathetic returns from debt mutual funds. Is it better to invest in bank deposits or in NPS for the long term?
Fixed-income instruments are relatively less volatile than equities, and lend stability to the portfolio and protect against purchasing power erosion due to inflation. Investments in fixed income instruments / debt funds are typically subject to interest rate risk and credit risk.
Yields have fallen substantially, particularly at the shorter end of the yield curve. The sharp fall in yields has in fact benefitted most debt funds, given the inverse relationship between interest rates and bond prices. However, for new investors coming in the yields are relatively lower than those prevalent earlier.
You should evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.
Banks too have cut down on their deposit rates in line with the sharp fall in market interest rates. Interest from bank deposits for longer holder periods (>3 years) are taxed at marginal rate, compared to a favourable tax rate of 20% post indexation of costs in case of debt mutual funds.
The National Pension Scheme, or NPS, is considered as a long-term investment vehicle for building a retirement corpus.
It offers two choices:
- Active Choice: This option allows the investor to decide how the money should be invested in different assets.
- Auto choice or lifecycle fund: This is the default option which invests money automatically in line with the age of the subscriber.
The Active Choice offers three funds or investment options:
- Asset Class E (invests 50% in stocks)
- Asset Class C (invests in fixed income instruments other than G-secs)
- Asset Class G (invests only in G-secs)
An investor can choose one of these funds or opt for a combination of them. One may opt for a 100% fixed-income option under the 'Active choice' option. However, the NPS also invests in the same universe of corporate bonds, government securities (G-secs), and other debt market instruments. Hence, would fetch similar yields as those in mutual funds.
Post your query by accessing the Ask Morningstar tab. Our team will endeavour to answer queries ONLY related to mutual funds and portfolio planning from our registered readers.
