This post is going to have a drastically different theme than my other posts. I am going to talk about investing money in India. This, however, does not constitute any financial advice. This post just captures and contrasts the result of a particular investment I made a few years ago to another one I could have made instead at that time. So let us begin from the beginning.
After my postdoc at NTU ended in early 2017, I returned to India along with all the money I saved up there. (I think ~NT$100 still remain in the bank at NTU as some interest was deposited after I had left. “Why didn’t I close the account there?”, you ask. That’s because the lady cashier helping me with my international transfers and clearing up my account convinced me that if I decided to come back, I could start using this bank account again, so no need to close it!). These savings were transferred to my NRI account in India. Having returned to India, that account could no longer be called NRI (Non-Resident Indian) so I had to visit the branch and convert the NRI account to an ordinary RI account. The branch manager was fine with doing that but also suggested that I invest most of those savings in a Mutual Fund (MF) instead of just keeping them in the Savings Account (SA) or putting them in a Fixed Deposit (FD). I was thinking of parking these savings in FD, but this guy again convinced me to try this one particular MF, which he said was very much like a FD with almost no risk, and would have some tax benefits. He showed me this demo table to highlight what he was talking about (click on the image to see a high-res version):
The main takeaway was that after taking into account the Indian taxation rules, the MF would have an effective annualized return rate of 7.1% vs. FD’s 4.9%, even if FD enjoyed 7% pre-tax interest rate. Let’s keep this difference of 2.2% in mind.
One problem was as much as he wanted to say “no risk”, the mutual funds are of course “subject to market risks” so there is no guarantee of returns like there is with deposits in SA or FDs. Another problem was that the money I would put in this MF would be locked for 3.25 years! At that time, I did not yet have an offer from SINP and locking away funds seemed risky from this perspective too. But then everything has an associated risk and the history of these particular types of MF hadn’t seen anything bad so I planned to give it a go. Obviously not with ₹10 Lakhs (≡₹1 Million) as written in the demo table but with half of it.
Yet another problem was that I wouldn’t be “someone in highest tax slab” so was not sure how much tax benefit I would actually get. As has turned out over the years, I am “someone in almost-tax-exempt tax slab” so I think I will get almost no tax benefit from this as can be seen in the table below made in the same format as the demo table (click for hi-res image):
The takeaway from the table above is that the tax benefit for me is none whatsoever. The capital gain after 3.25 years from my ₹500K investment is barely ₹97K, which means the actual effective annualized return rate for this MF is 6.2% compared to 7.1% of the demo table. Adding to that disappointment, an FD created for the same duration with actual pre-tax interest rate of 6.5% would have an effective rate of 7.7% compared to 4.9% of the demo table. So the difference is –1.5% (i.e., an FD would have been a better choice for me than this MF) compared to 2.2% of the demo table.
Anyway, just for completeness sake, let us also look at the actual outcome for someone in the highest tax slab (again, click for hi-res image; the footnotes are same as in the previous table):
In this scenario, the tax benefit is there but it is just (6.2-5.4)% = 0.8% compared to 2.2% shown in the demo table.
So the final takeaway is “Mutual Funds are subject to market risks and / or pandemics”. That’s all for this post. I will leave you with
