When it comes to Investments, the favorite go-to instrument of most Indians is Fixed Deposits in Banks.
There are many reasons behind this like lack of awareness about other instruments or misconceptions about equity and mutual funds.
My opinion on investing in fixed deposits is that Instead of buying an FD from a Bank, why don’t we purchase equity shares of the same Bank.
FD gives you fixed interest income. Equity will grow your capital as the Bank’s earning grows plus a part of the Bank’s profit as dividend.
But Keshav!! Equities are risky assets, how can you compare two instruments which are opposite to each other in terms of Risk.
A risk-averse investor should always go with low-risk debt instruments. Right?
Yes Right but one thing that gives this comparison an edge is the Time Horizon.See the majority of investments in FD’s are for a long period of time like 3 Years, 5 Years, or even 10+ years.
And, In the long term, the Risk associated with equities is less as compared to short term, Equities are more volatile in the short term.
The initial idea of this post was to compare FD’s vs Bank Stock in which I was thinking to compare the returns from FD’s and equity share of a bank.
You have a surety of returns on FD’s, but returns in equities depend on the Bank you choose to invest and the time of your entry in that particular script.
You may even get negative returns if the Bank you choose is not fundamentally sound.In such a case, the ideal solution is to go with large-cap market leaders like HDFC bank or SBI.
We know today that these Banks are market leaders, we didn’t know this ten years ago, And who’s going to lead the industry 20 years from now.
So to avoid the Risk of wrong selection.
Let’s take the top performers of the banking sector.The 12 most liquid and large Banks, i.e., NIFTY BANK
So I gathered the last 12 Years data of Nifty Bank
and compared the past returns of Bank Nifty with FD returns.
It is assumed that an investor has invested in Bank Nifty on 1st January of every year and continue to hold that for the next 5 Years.
Also, to simplify it, I took an average Rate of 8% For Fixed deposits.
I took seven consecutive five year period starting from 1st January 2008 and calculated CAGR for each period.
The periods 2008-13 and 2011-16 showing us a low CAGR returns mainly due to the 2008 financial crisis, but we should not forget that if we include the dividend yield, Bank Nifty can easily outperform FD’s.
Rest in all other periods as you can see, the Nifty Bank beats FD’s by a HUGE margin.
In most cases, the capital has been more than double.
Let’s talk taxation !!
Fixed Deposits generally do not have any tax benefit, Yes you can get the overcrowded 80C deduction on some tax-saving FD’s up to 1.5Lakhs.
The Bank deducts 10% TDS if the interest income for the year is more than Rs 10,000 after that you get taxed as per your tax slab.
For Equities, there was no tax on LTCG, but after Budget 2018 there is a 10% tax on long term capital gains.
It’s quite messed up. Right!!
So It was better to ignore the taxation part, for now, to keep it simple to understand.
How to invest in Bank Nifty?
See Nifty Bank is an Index you cannot directly buy it.
You have to to get an ETF or Index fund which replicates the performance of Nifty Bank.
Get the one with the lowest expense ratio.
Conclusion
FD’s are not very good at saving tax, and they are risky in the long term as they can’t keep up with the inflation.
One should use FD’s for the short term.
On the other hand, Equity investments not only help in saving tax but beats inflation in the long term.
Instead of buying a financial product from the Bank Be a part-owner of the Bank.
