A savings account may be the one you use most often if you are a salaried employee or a housewife or a student. You may also be using a recurring deposit to accumulate savings by investing small amounts every month. The same short-term plans of debt funds explained earlier can be used to deposit your salary or small savings, and they will give you the ability to earn higher returns than your savings account. If you have chosen the wise option of accumulating savings every month, systematic investment plans are offered by most debt funds as an alternative to recurring deposits.
All these debt funds also come with the big advantage over FDs of not having a specified tenure. This saves you the hassle of reinvesting after the term is over and the pain of losing interest if you break the FD before its term.
Let me give you an example. Look at two persons, Mr. Sharma and Mr. Verma who have just received a bonus and want to save it for a year. While Mr. Sharma invests his bonus in a one-year FD, Mr. Verma invests in a medium-term debt fund. Now, nine months after this, a very attractive deal is available on a second hand car, but the seller wants cash. Mr. Sharma worries about the fact that encashing his FD will make him lose his returns and dithers, while Mr. Verma seals the deal with the seller and fills out his redemption request slip for his medium-term investment plan at a branch of a private bank. His investment in a debt fund is automatically deposited back into his savings account. He immediately withdraws the cash and settles the payment for the car. All this without any worry of losing the returns he has accumulated for nine months.
The other important benefit is that while FDs give no tax benefits, debt funds are tax-free in the hands of the investor with the company paying a 12.8 per cent dividend distribution tax. If held for more than a year, a debt fund investment in fact attracts only 10 per cent tax. So as you see, current accounts, savings accounts, recurring deposits, short, medium and long-term FDs each have a corresponding alternative offered by a range of debt funds.
To understand the process of investment, let us return to Mr. Sharma. After missing out on the car, he decides to invest the amount he receives from his FD in a debt fund. For this he goes to a private bank and asks for an application form, fills up the simple form, attaches the cheque for the amount to be invested and returns it at the same branch immediately. In case he has any queries, he also gets them clarified by a financial adviser present at most branches of private banks. He receives a statement confirming his investment and giving his folio number within three days. In case he wants to know the status of his investment, he can now visit the website of the fund for the net asset value of each unit of the fund he has invested in.
When Mr. Sharma wants to withdraw, he can go to the same branch and fill a withdrawal slip to see his withdrawal proceeds credited to his account the very next day. As you see, investment and withdrawal in debt funds is a quick and easy process.
(The author is MD, Standard Chartered Mutual Fund. The views expressed in this article are his own)