FD or MIS (Invest smart)

Its really confusing when we try to decide where to invest.Many options are available.
Invest smart series will discuss these options and comparison between them.

Invest smart -1
FD or MIS
We know FD as it is easy to invest and easy to calculate interest.Consider MIS too and then decide.Example given below will clear things.

Suppose Mr A invests Rs 90,000 in Bank FD for six years. With the rate of deposit hovering around 7%, Mr A will receive almost Rs 46,500 as interest at maturity and an option of compounded interest. On the other hand, if Mr B put Rs 90,000 into MIS today, he will receive Rs 600 every month for 72 months. He is entitled to Rs 43,200 in the form of monthly interest till maturity and Rs 4500 as bonus at the time of maturity. Mr B’s returns total Rs 47,700 in six years, which is higher than interest earned on the bank FD of the same tenure.

Suppose that Mr B did not require the monthly interest. So he opts for automatic transfer of MIS interest to Recurring Deposit. A sum of Rs 600 is deposited in his RD account every month, offering 7.5% per annum compounded quarterly. At the end of the sixth year, Mr B will receive almost Rs 51,400 from his RD account. The receivables from RD and the bonus on MIS total Rs 56,000 in six years. As a result, Mr B, who invested in MIS and monthly proceeds in RD, will accumulate Rs 9500 more than Mr A, who opted to invest in Bank FD of the same tenure.

The same features of MIS make it unattractive. The interest income is fully taxable as in the case of bank FDs. MIS do have an edge over bank FDs as there is no tax deduction at source (TDS). However, the bank FDs maturing above 5 years are subject to tax benefits under Sec 80C.

It will be definitely a better bet if one neglects the tax implications of the scheme. The rate of return is not interest rate sensitive. Though the general interest rates may fall further, the scheme will continue to fetch 8% fixed rate of interest. Further, a combination with RD will even earn an effective yield of 10.5%, which is attractive in times of uncertainty and falling interest rates.

Cheers!