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My fund has given unsatisfactory returns. Should I switch to fixed deposits?

Dhirendra Kumar sheds light on the advantages aggressive hybrid funds have over fixed deposits

I am a retiree and had invested some Rs 1.7 lakh in an aggressive hybrid fund around four years back. Now the return is coming to about 8.8 per cent. Now this is also subject to long-term capital gains. So do you think I should continue with it or invest in some fixed deposits?
- Mr. Sehgal

No, not really. I would say that a return of 8.8 per cent that is subject to just 10 per cent capital gains tax and that too only when you realize it is alright. If you actually mount a withdrawal plan on this, a good part of your withdrawal will come out of your capital. Therefore, most of the gains will still remain invested. So if you are periodically withdrawing some money from this aggressive hybrid fund for your retirement income, these funds will still turn out to be more tax-efficient as compared to fixed-deposits. On the other hand, fixed deposits are subject to annual taxation. In case of aggressive hybrid funds, you are able to work on a tax-deferral as you are not liable to pay any taxes till you withdraw your money apart from the taxes on your periodic withdrawal to support your income requirement.

Assuming that you are able to take out eight per cent of your income as withdrawals, I feel only seven to eight per cent of the total withdrawal will be subject to taxation as only that will be the gain component. The remaining capital, i.e. the outstanding investment will not be subject to any taxes.

Further, equity performs well over a period of time and behaves erratically in between. The return you are mentioning has come over a period of four year. Of these four years, two years were very good while two other were not so good or rather one was horrible. Despite that you have been able to derive this return, so that is decent enough.

To put it in a nutshell, if this is not your primary source of income, I would ask you to stay put. This is because I still find merit in holding an aggressive hybrid fund for supplementary income or as a component of your investment to provide you with inflation protection. All fixed-income avenues that we have are able to protect your capital but not beat inflation. Beating inflation is a very important objective during retirement, otherwise you run the risk of running out of your savings and becoming poor in 5-10 years from now.