VR Logo

MFs Vs Recurring Deposit

I plan to put Rs 36,000 P.A. in PPF account. Is it better to set aside Rs 3000 per month in a recurring bank deposit or invest in a diversified equity fund?
Akash Agarwal

I plan to put Rs 36,000 per annum in PPF account. For that I would be putting Rs 3000 per month in a recurring bank deposit and then transfer this money into the PPF account before March 5, 2008. Is this a good idea or is it better to put the Rs 3000 in a diversified mutual fund? I am also planning to invest Rs 8,000 per month in three ELSS schemes. For this I have short-listed four schemes namely, Birla Tax relief 96, Magnum Taxgain, Reliance Taxsaver and ING Vysya Tax Saver. Kindly help me choose the best three out of these four.
- Akash Agarwal As of now there are many lucrative avenues to temporarily park funds, interest rates offered by banks on term deposits have become very attractive. A recurring deposit with a maturity period of 181 to 365 days will offer you a return of between 6 - 7 per cent. You can expect a similar sort of return from a short-term debt fund. The only difference being that in case of an RD the return will be guaranteed, however a mutual fund will not carry such a guarantee. Moreover, the returns on both these investments will be taxable. We would strongly advise you to stay away from diversified equity funds for such a short investment time horizon. For equity investments can be risky and you could lose the principal amount invested in case the markets turn bearish around the redemption time.

Your choice of funds is really lacking a proper analysis. While Magnum Taxgain is a must have for every ELSS investor, the other three funds identified by you are average performers. We would recommend HDFC Taxsaver, Birla Equity Plan and HDFC Long Term Advantage, instead. Also tax planning should not be a stand alone exercise. In selecting tax planning schemes you must take cognizance of your portfolio's allocation to companies of different market capitalisation.

Of these four funds Magnum Taxgain and HDFC Taxsaver are large cap players while the other two invest predominantly in mid cap companies.

Post Your Query