The government’s demonetisation drive has opened up huge opportunities for financial services companies to press ahead with existing and prospective investors to use the electronic and digital modes of banking to invest in their products. And investors, those who are already using the electronic and digital channels for banking, can look forward to more convenience and security when they use these channels for banking and investment.
There, however, exists a large number of people who have mostly used cash for saving and investing, with most ending up with abysmally low or no return on those returns. In addition, savings in the form of cash also carried huge risks.
The demonetization drive is also expected to bring in a large number of people into the banking fold and also within the tax brackets. This will in turn push them to think more and more about investment avenues which are more tax efficient and can also beat inflation in the long run. Financial planners and advisors say as investors start to calculate the impact of these two factors on their investments, mutual funds stand a high chance of scoring above most other comparable investment products. In other words, in an era when the impact of tax and inflation would matter, investors would be better off investing in mutual funds than most other financial products. And more so for meeting their long term financial goals, they say.
For one, mutual fund products offer better tax efficiency than other comparable products. Long term returns as well as all dividends from mutual fund investments are tax free in the hands of the investors. In comparison, if one parks his/her money in say bank fixed deposits, there is a tax on the returns. The same holds for returns from recurring deposits. Also investors need to account for some tax outgo on returns from investments through pension products offered by financial services companies other than mutual funds. In terms of taxation, PPF investments are at par with mutual fund investments.
In terms of returns, equity mutual funds score over most other comparable products in the long run. For example, even on a five-year basis, average annual returns from various categories of schemes within the mutual fund universe varies between 13% and 26%, data from Value Research showed. In comparison, PPF gave a little less than 9% average yearly return, bank FDs returned about 8.5%, savings bank 4% in most banks, while traditional money back insurance policies gave about 5%, data from various sources showed. Gold funds on the other hand gave a marginally negative return in the last five years.
If one considers even longer investment duration, say 20 years, post-tax returns from equities is about 13%, more than double compared to FDs and real estate while much higher than gold (8.4%). With demonetisation, financial planners and advisors say that gold and real estate are expected to witness a tough rise while financial assets could see increased interest.