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Looking Beyond Fixed Deposits

With fixed deposit rates from banks on a downhill, regular income seekers should look at income funds too. Spreading your money over various investment avenues is the right approach. At the same keep a track of your investment purpose too.

My mother has Rs 3 lakh invested in fixed deposits with nationalised banks. She would like to move this amount to an income fund so that she gets better returns. Should she put all of it in one go in a fund or should she invest in different funds over a period of time?
Praveen Joshi

It is a good thing that as a fixed income investor your mother has started looking beyond bank fixed deposits. While most nationalized banks have drastically cut interest rates on fixed deposits, income funds have had a good going recently. They have delivered a decent 12-13 per cent in past one year, even though this was achieved in an unusually bullish debt market.Do keep in mind that this performance is unlikely to be sustained over a period of time. You should expect annual returns from income funds to settle down in the 7-9 per cent range. While in itself this may not be much, it is much better than what an FD will give.

That said, there are a host of other reasons to prefer funds over FDs, chiefly liquidity, ease of investing and tax-efficiency. Funds are easy to get into as well as easy and quick to get out of. Interest from FDs is taxable over a certain limit. These are usually taxed according to your income bracket. Debt funds on the other hand attract a long term capital gains tax of 20% with indexation, or 10%, which ever is lower. So do go in for the growth option.

As far as the details of investing go, the golden rule, as always, is not to put all your eggs in one basket. Not only must you spread your investment among funds that follow a different approach, but you could even retain a certain amount in the FDs.As to the investment pattern, it is best to fine-tune that to your mothers' likely investment and redemption needs. If she is still earning, you could transfer most of the money to income funds and then perhaps keep adding to it through a Systematic Investment Plan. Or, if she has already retired, you could investment in one go and then add a Systematic Withdrawal Plan if she needs to use the income for any regular purpose.

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