If you invested Rs. 1,00,000 in a bank fixed deposit which pays 8% p.a. before taxes, you will get Rs. 8,000 as interest and assume you pay 30% tax you will be left with Rs. 5600 at the end of the year.

Assume further this amount is re-invested and earns 8% p.a. ….and the same thing continues for 25 years. Over this period you would have paid Rs. 124491 as income tax and your capital accumulated would be Rs. 390,000.

However if you had invested Rs. 100,000 in a mutual fund with a GROWTH OPTION and earned 8% p.a. and had not withdrawn any amount do you realise you would have Rs. 685,000??.

Of the gap between 685,000 to 390,000 only Rs. 124,491 is explained by taxation – the rest is the effect of compounding. That ladies and gentlemen is greater than the tax!

Now imagine if the fixed deposit was Rs. 25,00,000 for 25 years.

Chartered Accountants keeping their own money and advising clients to keep their money in fixed income securities leaves me perplexed.

 

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  1. sir good example
    but reality is FD we get 5600 which is 5.6% only.

    so clearly rate which is 5.6 with tax and 8 without tax 8 without tax will be more

    கைப்புண்ணுக்கு கண்ணாடி எதற்கு

  2. Subra Sir, why not invest in EPF, PPF which are tax free interest compounding for debt loving people instead of Fixed deposit.. since the given example is of 25 years

  3. Dear Atul,
    1) PPF comes with a lock in.
    2) PPF has limits/conditions to withdrawl.
    3) PPF has a upper limit to the amount which can be invested in a financial year.
    4) Try to understand the essence pls.

  4. The outperformance of equity vs debt will increase as interest rate come down.

    At 12% interest rate, debt vs equity is a debatable decision. At 6% interest rate, equity pulls ahead strongly.

    The dividend yield on the S&P 500 is now more than the yield on the US treasuries.

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